The reputation of so called ‘pre-pack’ administrations has not always been positive but, in the right circumstances, they’re an effective way of ensuring the future of an otherwise insolvent business. The mechanism allows a potentially valid company to survive, but relieves it of otherwise debilitating debt.
In the midst of a global pandemic, when otherwise viable businesses are finding themselves in unfamiliar financial territory (in many cases, for no reason other than the impact of the pandemic), the option of restructuring in this way is, unsurprisingly, likely to be attractive. For creditors though, the prospect may not be as appealing.
In recent years, the number of pre-packs has generally been falling – be it because of a negative reputation, a changing regulatory and legal landscape, or the appeal of alternative routes. But, as Government restrictions relating to Covid begin to be lifted – whether that be the furlough scheme, or the kind designed to provide businesses with breathing space to continue operating throughout the pandemic – the prospect of a rise in pre-pack administrations is definitely on the horizon.
It’s perhaps no coincidence that the process has come under Government scrutiny at a time when a pre-pack may be regarded as a ‘quick and easy’ solution for struggling companies. Reforms, which will come into force at the end of April, following lengthy consultation by the Government, are designed to rehabilitate the process. The changes (which introduce an independent evaluator) are likely to make pre-packs less straightforward and potentially more expensive to complete.
The reforms are broadly well intentioned – designed to increase trust in the process and reduce the perceived abuse of the mechanism in the past – they may well prove to be an effective way of shaking off the generally negative perception of pre-packs in some quarters. In the right circumstances, and conducted appropriately, pre-packs have always served as a useful tool. It is to be hoped that these reforms will complement the process rather than hinder it.
Whilst it appears unlikely that the floodgates are about to open, with businesses rushing to complete pre-packs before the changes come into effect, there is a window of opportunity for those considering restructuring and it may be prudent to review potential options in that respect prior to the changes coming into effect.
That said, pre-pack administrations will, of course, continue to be a viable option post 30 April. No doubt the industry will adapt to the reforms and we will continue to see the use of the process in appropriate circumstances.