Major changes are afoot in the business-buying arena, with a shake-up coming in 2016 that will see a drastic shift in the way insolvencies and pre-pack administrations are handled.
Pre-pack administrations refer to when an arrangement for the sale of all or part of a business is negotiated with a buyer prior to the appointment of an administrator.
Pre-pack sales are generally executed before the insolvency of the company becomes widely known – this can preserve asset values and jobs that may otherwise be lost, and can help to enable a viable business to continue. But traditionally they are deals that have been carried out behind closed doors.
While frustrating for business buyers, who typically only find out that a potential acquisition target has fallen into distress when a deal for the business or its assets has already been completed, the existing pre-pack process has also proved unpopular with many of the creditors directly involved in them.
But things are about to change, so creditors and business buyers alike will need to be aware of the insolvency shake-up that is going to take place in 2016.
Modernising the process
Next year, changes will be introduced to bring insolvency practices up to date with today’s fast-moving, technologically-advanced age. The changes come following a state-commissioned inquiry into the pre-pack processes, amid concerns that it did not protect creditors’ interests.
Led by Teresa Graham CBE and first published in June 2014, the report was commissioned by Vince Cable during his tenure as the Secretary of State for Business Innovation and Skills. It forms part of the UK Government’s wider ‘Transparency and Trust’ agenda, but one of the fundamental aims of the insolvency shake-up was to modernise the pre-pack administration process.
At present, when a company is heading into administration a meeting will take place to explain the financial state of the business to its creditors. The creditors can then discuss and vote on what would be best for the insolvent company.
These talks consume time and money – meeting rooms must be booked, creditors must travel to and from the chosen location, and, most costly of all, insolvency practitioners must be paid.
This is one thing that will change under the new laws. Come 2016, the obligatory face-to-face meetings will be replaced by options to use more modern methods of communication, including emails, conference calls, videoconferences, and online voting. Furthermore, much of the correspondence between the insolvency practitioner and the creditors will also be done via email, again making the whole process faster, simpler and cheaper.
Creditors will save money in other ways too; claims for dividends of less than £1,000 will no longer require a formal application from the creditor, which cuts out the costs incurred when the insolvency practitioner checks through the claim. Essentially, from October 2016, an insolvency practitioner will be able to use the accounts and financial records of the insolvent business to establish validity of creditor claims under £1,000.
Increasing scrutiny
However, the changes are not just designed to make things easier for the creditors connected to the insolvent business; further developments will ensure greater scrutiny of the whole pre-pack process.
Under the Government’s new insolvency rules, ‘pools’ of independent experts will be created. These experts can then be called upon to oversee processes in which any party connected to the insolvent company has pre-planned to acquire a business out of administration – in doing so they will scrutinise the details of the pre-pack deal, thus creating greater transparency over these hitherto secretive dealings.
Duncan Grubb from Pre-Pack Pool Limited, the organisation responsible for establishing the pool of administration overseers in the UK, said of the changes: “The reforms strike a balance between transparency and the discretion needed for business and job rescue.
“While the pool is voluntary and its opinions are not binding, it will reassure creditors about the reasonableness of the pre-pack transaction and its justification in the circumstances.”
Benefits for business buyers
Greater scrutiny, transparency and regulation during the process of agreeing a pre-pack administration will come as welcome news to creditors. But what do business buyers stand to gain from the changes?
Firstly, the aforementioned introduction of independent experts to oversee and scrutinise the deals will prevent pre-pack administrations being rushed through. This time delay makes it more likely that business buyers will be alerted if a company is in distress – this in turn gives buyers the opportunity to evaluate if a business heading into administration has any assets of interest to them.
Businesses in administration typically represent better value for buyers because they are in a rush to realise the value of their assets for creditors or owners. Therefore, anything that makes it more likely that prospective business buyers will hear of more companies entering administration is good news.
Indeed, for business buyers, preventing deals from being wrapped up quickly and behind closed doors is critical in ensuring a more level playing field. That will be the main benefit presented to them by the 2016 insolvency shake-up.
Creditors and other parties associated with the distressed businesses will naturally still have a head-start over other potential buyers when it comes to snapping up the business or its assets; but ensuring this process is overseen and checking it is done correctly and fairly will maximise the opportunities available to business buyers.
Stephen Ideh, head of acquisition research at Business Sale Report, commented on the changes to pre-pack deals: “At first glance, business buyers might think that the insolvency changes being introduced by the Government next year only affect creditors and insolvency practitioners. However, in reality buyers stand to benefit from the changes, too.
“Distressed businesses are always attractive to buyers because assets can be bought at a reduced price. Thanks to these changes there will be greater visibility into which businesses are headed for administration and what acquisition opportunities are therefore available to business buyers.
“This also means that it is going be more important than ever for buyers to keep a keen eye on opportunities as they appear and to act promptly on their interest.”
Daily updated list of businesses in administration
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