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New pre-pack insolvency rules to be delayed

New laws aimed at regulating pre-packaged insolvency sales will be delayed until at least next April, the government has confirmed.26 Aug 2011

The Insolvency Service - part of the Department for Business, Innovation and Skills - led a short consultation on the reforms in June, and new laws had seemed set to come into force on 1 October.

The statutory instrument outlining the proposed changes has been removed from the Insolvency Service website.

A pre-packaged insolvency involves marketing a business to a new buyer before a proposed insolvency procedure begins and selling it immediately thereafter.

The process preserves the value of an insolvent company by minimising the length of time that company is subject to a formal insolvency procedure. A company can also be sold back to its directors or previous owners.

The changes as originally drafted would see creditors given three days' notice if a company was to be sold to a connected party.

Insolvency practitioners do not currently have to give notice of a pre-packaged sale to unsecured creditors although permission of secured creditors - for example, banks – is required.

Supporters of pre-packs, including most insolvency professionals, had argued that the reforms as proposed would force more companies into terminal liquidation said Alastair Lomax, an insolvency expert with Pinsent Masons, the law firm behind Out-Law.com.

The Insolvency Service has not yet indicated what changes will be made to the reforms as drafted.

"The Insolvency Service has continued to discuss how best to implement the new measures with insolvency practitioners, creditor representatives and other interested parties. As part of those discussions, comments have been received on a draft statutory instrument, which are being considered by officials. The version previously published on the Insolvency Service website has been removed to avoid confusion," a spokesman said.

"Prior to implementation, which will not be before April 2012, a revised statutory instrument will be published on our website," the spokesman said.

The insolvency trade body R3 had opposed the plans, claiming that businesses subject to a mandatory three-day notice period risked losing staff and customers while unable to trade.

"It is important to note that a pre-pack is chosen due to the speed of the procedure which helps preserve the value of the business. When faced with [a notice period] directors may simply decide that liquidation is a better route," Steven Law, president of R3, said in March when the changes were announced.

"This is welcome news. Pre-packs are controversial and there is no doubt that reform is needed. However, in many cases pre-packs have become the only viable means of rescuing businesses which might otherwise fail completely. It was far from clear that the proposals as originally drafted were workable or tackled the pre-pack problem," said insolvency expert Lomax.

"As [R3] has pointed out it may be more productive to direct legislative reform at why pre-packs have been deemed necessary in the first place. A decision allowing further time for the government to reflect and consult on how best to address the issue is to be welcomed."

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Pinsent Masons' Restructuring team helps a wide range of clients who are working with businesses in financial difficulty to rescue those businesses, improve recoveries and save jobs. We do this by working with all parties to identify opportunities and risks and to deliver innovative strategies to achieve our clients’ goals. Our clients trust us to work on many of the UK's most high profile restructuring assignments. We also draw upon a wealth of expertise and market contacts which we use to introduce new business opportunities to clients.

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