THE NEW Year was awash with administrations as the retail sector was badly hit by poor Christmas trading including Hawkins Bazaar, Barratts and D2 Jeans to name a few. Unfortunately, corporate insolvencies show no signs of slowing down in the next 12 months with controversial pre-pack administrations also likely to rise in popularity.
Your company is almost certainly going to find itself as a creditor, in current economic circumstances. As FD, chasing payments from administrators is often frustrating and slow.
Pre-packs entail the whole or part of a sale arranged prior to a business entering an insolvency process and sold immediately on appointment of administrators. The rapid insolvency process currently leaves little or no time for creditors to question the deal.
Some businesses are sold back to a connected party, such as existing management or current owners, which can arouse panic for many FDs. However, the government aims to give creditors more power to veto a sale and voice concerns over decisions made in these types of sales.
Businesses sold via pre-pack are usually in the process for just a few hours. But, business innovation and skills minister Edward Davey could see it drawn out by extending the process for three days if a sale is to a connected party.
The proposals suggest this is enough time for creditors to lodge any complaints they have about the pre-pack and stop a sale if necessary.
However, the window of opportunity is not satisfying either creditors or administrators. The British Property Federation claims three days is not nearly enough time for creditors to get to grips and question the sale. Meanwhile, administrators believe the proposals are neutering the benefits of the rapid turnaround insolvency by slowing it down.
There is also confusion over how many ‘feared’ connected party sales take place. In 2010, about 72% of all pre-packs were sold to a connected party compared with 79% in 2009, according to insolvency trade body R3. However, the government’s Insolvency Service estimates that figure to be just 40%.
Davey has not stopped there with his changes to pre-packs. Currently the appointed administrator must complete a SIP16 form which outlines why they chose the insolvency process, how they marketed it and evidence they achieved the best price. Currently SIP16s are sent to creditors and the Insolvency Service, but Davey wants to make that information publicly available, putting administrator decisions in the spotlight and putting pressure on them to ensure they are 100% comfortable with their choice. That’s the idea, anyway.
Although the changes seem to have upset both sides with one suggesting it has not gone far enough and the other arguing it has handicapped the process, the government is pushing ahead with the three-day delay as soon as possible. It announced in 2011 that before the end of the year the proposals would be law. However, that was then deferred until early this year.
According to sources at the Insolvency Service, it is likely the proposals will come into play in April when changes to the Insolvency Act are expected to go ahead. ?
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