CONTROVERSIAL legislation governing “pre-pack” administrations will remain in place after the government abandoned an 18 month campaign to reform the law following strong lobbying from the insolvency industry.
The government said it was “not convinced” that new legislation would be worthwhile despite complaints that the agreements can wipe out the claims of unsecured creditors while still allowing the existing management to stay in control.
A pre-pack involves the sale of a troubled business being agreed before the firm is put into administration. In January alone, retailers Bonmarche, La Senza and Blacks were sold in this fashion but critics say the system is open to collusion between execs and administrators.
Ed Davey, the Liberal Democrat business secretary, said new legislation would be contrary to the declared “moratorium on regulations affecting micro-business” and that pre-packs “can be the best way of maximising returns for creditors”.
The government had proposed to introduce a three-day period during which such deals could be challenged. The insolvency industry argued that extended administration processes can result in additional job losses at already loss-making firms.
Neil Smyth, a restructuring expert at Taylor Wessing, told City A.M.: “If you have to tell everyone that you are going into the insolvency process, then creditors will be trying to get in and improve their negotiating position within those three days.
“Undoubtedly some firms abuse the system to leave creditors behind, but the government can ban directors and our legislation is the envy of many of our European colleagues.”
Ian Fletcher of the British Property Federation, said the government “wasted 18 months” leaving “creditors as exposed to sharp practice as when this debate started”.