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Proposed changes to pre-pack insolvency sales regulation dropped by Government

The Government has scrapped proposed plans to change the rules around pre-packaged insolvency sales.26 Jan 2012

Ed Davey, minister for employment relations, consumer and postal affairs, said that the Government had listened to the views of "interested parties" and decided that it was better for small businesses not to impose further regulatory requirements on them. He said the Government was not prepared to introduce changes only applicable to larger firms.

"The Government is not convinced that the benefit of new legislative controls presently outweighs the overall benefit to business of adhering to the moratorium on regulations affecting micro-business which is an important plank of this Government’s deregulatory agenda," Davey said in a written ministerial statement seen by Out-Law.com.

"As much of the concern was related to small businesses, I do not consider that measures should be introduced just for businesses other than micro-businesses. It is for this reason that I am today announcing that the Government will not be seeking to introduce new legislative controls on pre-packs at this time," he said.

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.

Alastair Lomax, an expert in insolvency law with Pinsent Masons, the law firm behind Out-Law.com, said the Government's decision was "good news" for struggling businesses.

"The government appears to have listened to restructuring and insolvency practitioners and is right to scrap these proposals," Lomax said. "The proposed changes were unrealistic and would have been value-destructive for many businesses, and jobs, otherwise capable of rescue."

"This was particularly the case as regards proposals to introduce a three-day notice period to creditors of the distressed business concerning a possible sale," he said. "Pre-packs are already regulated and the focus should shift to putting resource behind enforcement to prevent abuse of the process rather than further regulating it."

Last June the Insolvency Service (IS) led a short consultation on reforming the rules around pre-packed insolvency sales and new laws had looked set to come into force in October. However the statutory instrument outlining the proposed changes was removed from the IS website and the body announced in August that the planned regulatory changes would be delayed until April this year at the earliest.

The changes drafted would have seen 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.

However, last March the Government announced a "moratorium" on new domestic regulation for micro businesses and start-ups. It said new regulation can add burdens to businesses and said the moratorium would provide "regulatory stability" to those firms until the moratorium ends at the end of March 2014.

Davey said that whilst pre-pack sales can be beneficial, some stakeholders had expressed concern about the new regulatory measures that were proposed. The Government had discussed its plans with representatives from secured and unsecured creditors, insolvency practitioners, and business representatives, he said. 

"Pre-pack sales can offer a flexible and speedy means of business rescue and when used appropriately can be the best way of maximising returns for creditors. However, everyone who is affected by insolvency is entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome for all creditors," Davey said.

"It is apparent that concerns remain about the use of pre-pack sales, particularly where the assets are sold to a connected party – something that is often referred to as ‘phoenix-ism’. I am concerned about the potential for sales to be effected at an undervalue, particularly in smaller-value asset sales, where unsecured creditors may receive less than they should.  I also believe that it is important to consider the effect of pre-pack sales on competitors in the market," he said.

Davey said Government officials will conduct "an urgent review" of the current rules around pre-pack sales and speak to stakeholders to find out "how the existing controls on pre-packs have been working". He said the officials would try to establish from stakeholders whether "more could be done within the existing regulatory framework to improve confidence and transparency". IS, which is part of the Department for Business, Innovation and Skills, is currently responsible for monitoring compliance with rules around pre-pack sales. Those rules require administrators "to provide creditors with early post sale information on details of the sale and the justification for it," Davey said.

"The issues raised by pre-packs are important matters that affect a wide range of stakeholders including business interests, and I look forward to discussing the findings of the review with stakeholders in the spring," Davey said.

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