The UK Government has announced new laws to enhance the scrutiny and transparency of pre-pack administrations.

What are pre-pack administrations?

A pre-pack administration is when the sale of a distressed company and its assets is negotiated before, or shortly after, the appointment of administrators.

Pre-pack administrations have become particularly popular in the property and construction industry. They allow a business to be sold as a going concern while it continues to trade, thereby protecting jobs and sustaining viable companies.

Why do we need new regulations?

Often, the business and its assets are sold to the company's directors, who then form a 'newco'. This sometimes raises concerns among creditors who feel their interests are not best served by pre-pack arrangements.

Pre-packs in the time of Covid

With a raft of corporate insolvencies anticipated due to the Covid-19 pandemic, the Government has decided to strengthen regulation. New rules, to be introduced under the Corporate Insolvency and Governance Act 2020, will require stricter independent scrutiny in circumstances where connected parties such as the company's directors or shareholders are involved.

While the substance of the reforms remain to be seen, proposed draft regulations published by the Insolvency Service include rules that would require either creditor approval or satisfaction of stringent third-party reporting requirements before an administrator can make a substantial disposal of assets to any person connected with the company.