Creditors better protected under new pre-pack rules

The Department for Business, Innovation and Skills plans to introduce a new rule that will require an administrator to give creditors three days advance notice if it plans to go through a pre-pack procedure, which involves a quick sale out of administration to pre-selected new owners.

Under a pre-pack there is no open marketing of the assets and the new owners benefit from reduced liabilities. Under the current rules, insolvency practitioners do not have to give notice to unsecured creditors.

Pre-packs administrations have become more common since the downturn began, with many retailers using them as a way to survive. Just this morning Retail Week revealed that Lombok has been bought out of a pre-pack administration for the second time in two years.

Homeform also went through the process in July while in March owners of World of Sofas bought the sofa business out of pre-pack administration.

R3, the insolvency trade association, told The Independent it opposes the plans, arguing that the three-day notice period could lead to a sudden loss of customers, suppliers and revenues. It said this may result in more companies opting for liquidation, leading to more job losses than under a pre-pack.