Changes to pre-pack rules

According to a recent CBI quarterly trends survey of manufacturers, 36% said that they had seen an increase in output during the past three months. This seems encouraging, but one wonders about the impact on the economy of the protracted holiday between Easter and the Royal Wedding.

One of the recurrent themes in any discussion about the economic situation is the perceived unfairness of so-called "pre-pack" sales whereby businesses which go into administration are sold without being marketed and without consultation of unsecured creditors.

Whilst these often provide the best chance of business continuity, many creditors see them as a means for existing owners to shed creditors and start afresh.

There are some existing safeguards in place - for example, administrators must provide an explanation to creditors of why a pre-pack was undertaken.

Changes announced last month by BIS are intended to ensure greater transparency by requiring administrators to give a three-day notice to creditors when a significant proportion of the business is to be sold to a connected party and there has been no open marketing, enabling creditors to express concerns or to apply to the court to prevent a sale.

Whilst any measures which increase confidence in the much-maligned pre-pack process would normally be welcomed, one does wonder whether a notice period will do more harm than good. In my experience, most directors of failing businesses - whilst they want to do everything possible to preserve continuity - are also well aware of the serious risks of any personal misconduct. Pre-packs are usually only carried out because the existing owners are the only potential purchasers capable of acquiring the business in a timeframe which will ensure continuity and some return for existing creditors. Imposing a notice period and therefore an additional delay in the process risks a depreciation in value. It remains to be seen what effect this will have in practice.