The UK government’s plans to tighten regulations on pre-pack administrations have sparked worries about the potential for misuse and exploitation. Pre-packs involve a company going into administration and swiftly being acquired by a party with a prior agreement to the owner. The government aims to introduce new rules that would enhance scrutiny and transparency in these transactions, mainly in response to high-profile deals involving private equity firms and industry tycoons, which have left creditors with significant losses. This move comes at a time when the COVID-19 pandemic is expected to lead to an increase in the number of companies resorting to pre-packs to address their financial difficulties.

In 2020, several prominent companies—such as House of Fraser, Monsoon Accessorize, Quiz, and Mamas & Papas—have already taken this route. Under the proposed new regime, deals would be subject to review by an appointed “evaluator” with the necessary expertise and experience. However, there are apprehensions that this approach could potentially be exploited. Colin Haig, the president of R3 (the trade association for insolvency professionals), raised concerns, warning that allowing anyone to give an independent opinion on a connected party pre-pack sale could undermine the overall rationale behind the reforms.

Furthermore, the proposals also introduce the option for connected parties to obtain multiple reports from an evaluator, raising additional concerns about the potential for manipulation. Landlords, who often bear the brunt of pre-packs when retailers escape lease agreements, have expressed their backing for independent scrutiny but have called for limitations on the number of opinions that buyers can request.

While a voluntary review system was established in 2015 through the Pre-Pack Pool, which oversees connected pre-packs, the number of referrals to the Pool has been relatively low. The role of the Pool in the government’s proposed reforms currently remains unclear. Peter Walton, a professor of insolvency law, has voiced general support for the proposals but has also expressed concerns about the vague qualifications required for an evaluator.

Overall, doubts surround the feasibility of the UK’s crackdown on pre-pack administrations due to concerns about potential abuse and a lack of clarity surrounding the proposed reforms. As more companies are expected to resort to pre-packs in the wake of the COVID-19 pandemic, achieving a balance between shielding creditors and facilitating business rescues becomes increasingly crucial.

Useful links:
1. UK government’s press release on pre-pack administrations crackdown
2. Official website of R3 – Association of Business Recovery Professionals