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Pre-Packing refers to the practice of arranging the sale of a business, either in whole or in part, prior to the company entering into formal insolvency. The proposed sale is then executed on the appointment of an administrator and often the creditors of that company have no knowledge of the transaction until the deal is done. Although common practice, the process is not legislated for within current statute but developed entirely through market practice.

On 16 June 2014, Teresa Graham published her long anticipated report to The Rt Hon Vince Cable MP who was then the Secretary of State for Business Innovation and Skills. The report, commonly referred to as ‘The Graham Review’ recommended a series of reforms to the way pre-pack administrations should be conducted.  It was hoped that the market could adopt the reforms on a voluntary basis with the overriding aim being to increase transparency, temper creditor concerns and improve public perceptions.

The review acknowledged that the pre-packing method can be an effective way to rescue a viable business, preserve jobs and encourage commerce.  However, it also addressed wider concerns that often a business is sold back to existing owners or directors who may have been involved in its failure.  On this basis the report made six key recommendations, all of which built on the existing principles of Statement of Insolvency Practice (SIP) 16 and went further in ensuing that pre-packaged sales are conducted with complete transparency.

The first (and possibly most notable) recommendation was for the creation of a ‘Pre-Pack Pool’.  The pool would comprise of panel of members from a cross-section of business professionals who can form an independent judgement as to pre-packaged sales, before they go ahead.

On a voluntary basis, connected parties to the proposed transaction would then approach the panel, with details of the proposed deal. Following a review of the information provided, the designated pool member would issue a statement.

Whilst a negative response from a pool member would not prohibit the proposed sale from going ahead, the outcome would need to be declared within the SIP 16 report to creditors.  If for any reason connected parties do not seek recommendation from the pool, this would also need to be declared within the SIP 16 report and could have a negative influence on the creditors’ subsequent decision to approve / reject the administrator’s proposals.

Almost a year on from the publication of the report, the industry has widely welcomed and accepted the recommendations made.  The creation of a pre-pack pool has been driven by The Pre-Pack Pool Steering Group and is well under way to becoming best practice.  In a letter to The Secretary of State on 6 March 2015, The Pre-Pack Pool Steering Group updated the Department for Business, Innovation and Skills on the progress made to date, and confirmed that it envisages accepting its first cases later this spring.

It is widely expected that if the recommended reforms are not implemented on a voluntary basis, legislation will follow.  The Small Business, Enterprise and Employment Bill has now received Royal Assent and will give the Secretary of State the power to make regulations imposing requirements, on sales by administrators to connected parties.

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