After many years of perceived abuse, the Government has announced that they are soon to introduce new laws to require stricter, independent, scrutiny (by an ‘Evaluator’) where connected parties purchase a failed business out of administration (a Pre-pack).
In announcing the move, the government said that while pre-pack administration sales are widely considered to be a valuable rescue tool, concerns have been raised that arrangements may not always be in the best interests of creditors. Lord Callanan, minister for corporate responsibility, said: ‘As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process. This new law will ensure all sales to connected parties are properly scrutinized – protecting the interests of creditors and the general public, as well as the distressed company.’
Pre-packs are a marmite subject – on the one hand they preserve a business, it’s future tax paying ability and the jobs of its employees, on the other, they often undervalue goodwill, to the detriment of the creditors, which usually include HMRC. Current administrations will often only try and market the business to external parties by a short duration advert on the specialist website:
I wonder if we should now expect audit style sign-offs for the valuation of goodwill on related party sales, or will administrators simply wait until the new 8 week window is closed then behave as previously?
Blog entry by: Ian Piper