Pre-pack administrations

This briefing paper has been replaced by another briefing paper: Insolvency: Company administration.

A “pre-pack” is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of the administrator, and the sale contract executed on the appointment of the administrator or very shortly afterwards.

When used appropriately, a pre-packaged administration (“a pre-pack”) can be an effective company rescue procedure. Pre-packs enable the sale of company assets to be undertaken quickly (reducing the likelihood of important contracts being lost), preserving the brand and the value of the business and, ultimately, returns for creditors. However, there are concerns about the transparency of the pre-pack administration procedure, in particular:

• where businesses are being sold to “connected parties” (i.e. directors, shareholders and others connected with the insolvent company);
• possible conflicts of interest for the insolvency practitioner (for instance, when appointed by the floating charge-holder); and
• a lack of involvement of unsecured creditors.

To address these concerns, a Statement of Insolvency Practice (SIP 16) was issued in January 2009 (and periodically updated), with additional measures being introduced on 31 March 2011. The current SIP 16 came into force on 1 November 2015.

Following the publication of a Select Committee report in February 2013, the Government announced in July 2013 an independent review of the pre-pack procedure. The Graham Review into Pre-Pack Administration was published in June 2014 alongside Pre-Pack Empirical Research: Characteristic and Outcome Analysis of Pre-Pack Administration by the University of Wolverhampton. Responding to Teresa Graham’s report, the Government said that it supported a voluntary approach and would work with business and industry to implement in full her six recommendations. A key recommendation, the introduction of a Pre-Pack Pool of independent experts to give an opinion on a proposed pre-pack sale to a “connected party” (if requested to do so), became operational on 2 November 2015.

The Small Business Enterprise and Employment Act 2015 (SBEEA 2015), which received Royal Assent on 26 March 2015, implemented another Graham recommendation, creating a reserve power for the Secretary of State to legislate if necessary in respect of pre-packs. Subject to a sunset provision, this reserve power expired at the end of May 2020, but the Corporate Insolvency and Governance Act 2020 has revived the power until June 2021. The SBEEA 2015 also introduced other measures to modernise various parts of the insolvency framework by removing unnecessary costs and regulatory burdens.

On 12 December 2017, the Insolvency Service announced that it would undertake an assessment of the impact of voluntary industry measures in respect of pre-packaged administration sales to connected parties. The findings of this review to help to inform a decision on whether further regulation is needed.

On 8 October 2020, the Insolvency Service published its report, “Corporate report: Pre-pack sales in administration report”. It notes that, while there had been some improvements to the marketing of pre-packs, there was low use of the pre-pack pool and continued concern around transactions under market value. On the same day as the publication of the report, the Government published draft regulations intended to apply to all pre-pack administration sales to a “connected” purchaser. Following a consultation, final regulations were laid before Parliament on 27 February 2021 and are due to come into force on 30 April 2021.

This briefing paper looks in detail at how pre-pack administrations work in practice under revised SIP 16; the “pros and cons” of the procedure; the recommendations of the Graham Review; and provides a summary of the measures introduced by the SBEEA 2015. It goes on to consider the Insolvency Service 2020 report and the new regulations on sales to “connected” purchasers. This briefing paper applies to England, Wales and Scotland.