They have historically had a disproportionate amount of press when the economic impact of such procedures is taken into account. Indeed Teresa Graham, who was commissioned by the government to look into this process has been quoted as saying that they “do not amount to a row of beans”

However they continue to receive a lot of attention as they are an easy target and very easy to criticise as they appear to be non-transparent, allowing unscrupulous directors and shareholders to shed liabilities and to continue the old business under a “new entity”.

As we have now started to see the implementation of the recommendations come into force by means of some of the clauses in the Small Business, Enterprise and Employment Act 2015, and the expected new SIP 16 will encompass some of the other recommendations, what will be the impact?

We consider that for a reputable firm of insolvency practitioners, there will be additional information requirements to adhere to but it should not impact on their choice of process, however the changes could result in the appearance of more pre liquidation sales of businesses to avoid the compliance with the requirements of the pre pack pool. The difficulty for insolvency practitioners is that it is not their responsibility to make a referral, they are only required to advise creditors whether or not such a referral has been made. It is the responsibility of the connected party purchaser to refer the matter themselves with details of the proposed deal being given as well as a viability review of the purchasing entity. The pre pack pool have yet to commit to a precise period for the turnaround of referrals but 48 hours has been mentioned so if this is the case this should not affect the transaction in the majority of cases, although there are some instances where time is definitely of the essence. Time will tell how many purchasers are likely to self-refer and we are sure that this will be influenced by the number that receive positive statements and the number that receive negative statements. What is unclear at the moment is what impact the receipt of a negative statement will have on the deal, although it would be a brave administrator who would progress the transaction in those circumstances. Could there be a situation where the same transaction is submitted multiple times as the terms change and what would be the impact on the business continuation if that were to occur.

There is also a sting in the tail, s129 of the Small Business, Enterprise and Employment Act 2015 includes a provision for the Secretary of State to issue regulations to prohibit connected party pre packs if it considers this appropriate. That is to say, if there is not sufficient self-referral. The only saving grace is that this is a sunset provision, and therefore must be enacted within 5 years of 26 March 2015, otherwise it will lapse. We are not sure whether individual purchasers will consider the implications of their actions on any future purchasers as they may have sufficient issues to deal with purchasing any entity out of administration.

Julie Swan
Partner

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