Pre-packs under scrutiny - again

Insolvency Bitesize - April 2018

With administrators removed from office in a recent high-profile pre-pack, the Government assessing earlier industry reforms and concerns about their use in dumping pension liabilities - what next for pre-packs?

Pre-pack sales continue to make the headlines. While some reporting of pre-packs is undoubtedly misleading, the recent removal of administrators from VE Interactive – once a billion-pound UK start-up – has once again shone a spotlight on the controversial business rescue tool. The administrators were removed by the High Court amid concerns about their failure to deal appropriately with clear conflicts of interest which prevented them from investigating issues with the pre-pack to the company’s former directors.

Concern has also been expressed in some quarters – notably by the Work and Pensions Committee – about whether pre-packs are too often being used to offload pension liabilities to the PPF lifeboat. While it is right, of course, to ensure any abuse is thoroughly investigated, perhaps the key question is what else can be done about unaffordable pension schemes.

The Pre-Pack Pool emphasised in its 2016 Annual Review that widespread use of the Pool may help reassure creditors about the pre-pack process and would help protect the procedure’s place in the insolvency framework. The Pool also stated that it hoped referrals to the Pool would increase in 2017 as stakeholders become more familiar with the way it works and the reassurance it provides. We’ll have to wait for its next Annual Review to see whether this has happened.

The Government has announced that it intends to assess the Pre-Pack Pool and Viability Statement reforms introduced in 2015. The stated aim of the review is to look at the impact of the reforms on all connected party sales in administration – not just pre-packs - and to help inform decisions on whether further regulation is needed before expiry of the regulation-making power in 2020.

In our view:

  • the number of referrals to the Pre-Pack Pool alone should not determine the success of the reforms, particularly given the historic low levels of insolvency filings and extremely low levels of complaints about SIP16: see our thought-piece – Keeping pre-packs afloat. Connected party pre-packs now make up a far lower proportion of pre-pack sales than used to be the case and that reflects a change in practice for the better; but
  • it seems likely that further reforms will be made. There is growing pressure to make referrals to the Pool mandatory in connected party sales – something supported by R3. Any changes need to take place alongside efforts to increase awareness of the benefits of pre-packs, as well as greater sanction for where the tool is misused.

The Government should be careful not to overact to stifle administration sales at a time when UK insolvency law needs to maintain its leading status in the face of significant challenges.