Pre-pack communications

By Clotilde Gros, Corporate

Between 2016 and 2019 the number of pre-pack administrations increased by 37% according to an Insolvency Service report published this week, and there have been a high number of high-profile pre-pack administrations reported recently. Some of these have been dubbed as ‘controversial’ by the media, and whilst it is a perfectly legal way of purchasing assets, it is often frowned upon because it is seen as a way of writing off debts and attempting to start afresh.

There are obvious advantages to a pre-pack such as continuation of business, preservation of asset value, job retention and, of course, avoiding the winding down of a business. Usually, when a company enters administration, its assets are auctioned to potential bidders. In a pre-pack administration, as the name suggests, the sale of assets is pre-arranged with a party and simply transferred to a newly-formed company.  

There are already strict regulations in place and every sale is monitored and scrutinised by regulatory bodies. This hasn’t stopped the Government, however, updating laws for pre-pack administrations to ensure that deals with connected parties face mandatory independent scrutiny.

We are expecting to see a rise in insolvencies as financial support from the Government comes to an end. The outlook is gloomy for businesses, and whilst we don’t know how these new regulations will be enforced or whether they will ultimately be used to stop to a pre-pack process, they will have a considerable impact on how companies will communicate the transaction.

In light of the increased scrutiny around each transaction, communications will be even more crucial to ensure that all criteria have been met and that the directors of the insolvent company demonstrate that all other options were considered before a pre-pack administration. They must be able to explain why a pre-pack is the best course of action and that they acted in the best interest of creditors, employees and other key stakeholder groups. As ever, transparency will be key.