R3 warns on insolvency reform plans

GOVERNMENT plans to reform “pre-pack” administrations could result in more companies going into liquidation, according to the eastern region leader of R3, the body for insolvency professionals.

Ministers are proposing a three-day notice period to give creditors a chance to object to pre-pack deals, where the sale of an insolvent business is agreed before the appointment of administrators.

Many suppliers owed money by failed companies have criticised such deals, particularly where the business is sold back to the same owners.

But Laurence Weeks, R3’s regional chairman and a partner at Cambridge law firm Taylor Vinters, says the Government’s proposals could jeopardise returns for unsecured creditors as a three-day delay could result in a depreciation in the value of the business, leading to greater numbers of liquidations.

“A pre-pack is a deal for the sale of an insolvent company’s assets which is set up before the company enters a formal insolvency process,” said Mr Weeks. “The deal will usually have been agreed before the insolvency practitioner is appointed, but will be executed by the insolvency practitioner shortly after appointment.”

Mr Weeks said pre-packs were a frequently misunderstood insolvency tool, the benefits of which were often lost in the debate over their perceived impact on creditors, and so any attempt to bring greater transparency to the process was to be welcomed.

But he added: “In today’s economic climate, with a dearth of buyers and incredibly tight financing, a pre-pack is often the only option left in a large number of cases.

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“Furthermore, the speed with which pre-packs are performed is crucial in maintaining value in a business which would otherwise be diminished once its severe financial difficulties become known to staff and customers. A delay of three days is a long time in business.”

R3 says the latest annual report to the Government on insolvency practitioner compliance found “no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations.”