Business minister Jenny Willott held the threat of legislation in reserve this week when she announced plans to clean up pre-pack insolvency deals intended to ‘make sure that businesses and customers get a better deal from failing companies’.
She said the government would implement in full the recommendations of regulation expert Teresa Graham’s review of such deals. This was ordered by her boss, business secretary Vince Cable, amid concern that small businesses and landlords are being left high and dry when arrangements are made to sell the profitable parts of companies on the brink before insolvency is announced, to obtain the best price possible.
Willott said: ‘We believe it will help restore trust and confidence in pre-pack deals. We will monitor progress and take the power to legislate if necessary.’
Her aim was to allow viable parts of a business to keep operating and save jobs. But those owed money must ‘know they are getting the best possible deal in the circumstances. Transparency is vital’.
Graham’s recommendations are intended to improve the results for creditors without being too costly. They target sales to ‘connected parties’ who are often the former directors or owners of the company after evidence that payouts to creditors are, as Willott put it, ‘often worse and the new business less likely to succeed following these kinds of pre-pack deals’.
The main recommendations include:
- Creating a ‘pre-pack pool’ where details of a proposed sale to a connected party are shown to an independent person for scrutiny.
- Requesting connected parties to complete a viability review for the new company to improve its chances of success.
- Requiring valuations to be made by an independent valuer who is covered by professional indemnity insurance.
- Ensuring proper marketing is undertaken to maximise sale proceeds.
Some critics may say that the measures do not far enough to stamp out abuse, but the ball is now firmly in the court of professionals such as chartered accountants, who have offered to help establish the pre-pack pool and who have reputations to protect.
The CBI believes the proposals balance the interests of creditors with the need to support jobs and growth. We shall see.
Perhaps the best hope is that they were published alongside moves to strengthen regulation of the insolvency profession to improve public confidence in the system. There will be stronger powers for the insolvency service as an oversight regulator.
Willott said: ‘For the first time, regulators will have a clear statutory framework that they must follow backed by sanctions for noncompliance.’
However, once again, we shall see. The first hurdle is that the new regime will only be introduced ‘when parliamentary time allows’. And we are, of course, ever closer to the general election in 2015.