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Pre-pack changes will create “more liquidations” 1 April 2011

R3 said an unintended consequence to the changes announced yesterday could be the value of a business depreciating and that delay could jeopardise corporate rescues. 

Steven Law, president of R3, said: “Three days is a long time in business, and if unable to trade in that period, is at risk of losing key staff and customers.

“When faced with this option, directors may simply decide that liquidation is a better route, and this would reduce returns to both secured and unsecured creditors and result in considerably fewer jobs being saved than under a pre-pack.”

Richard Williams, head of the London restructuring team at law firm Pinsent Masons, said:
 “Any measures requiring an administrator to delay the sale of a business needs to strike a balance, as they could jeopardise the proposed sale and result in the loss of jobs and a poorer return for all creditors.”

The announcement coincided with the annual government report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs. In 2010 only 1.7 per cent of cases were referred to the recognised professional body for disciplinary procedures and general compliance increased to 75 per cent.

R3 highlighted that the government’s monitoring report also indicates that there is “no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations”.

Law added: “Sales to connected parties tend to happen because there is simply no other buyer at the table and also occur in 40 per cent of business sales.

“It would be better for the business rescue culture if the government looked at ensuring suppliers are bound in the event of a formal insolvency or were prevented from making ransom payments.

“We have put these ideas to government as part of our ‘holding rescue to ransom’ campaign. If the proposals are to be taken forward we advocate that our ideas are also brought into statute to help businesses stay held together during the three day period.”

Insolvency practitioners estimate the change in legislation R3 is calling for will reduce the number of pre-packs by more than a fifth.



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