Pre-pack administration, which lets bosses of struggling firms wipe debt by going into administration and still trading, may be banned.
Regulations regarding the controversial deals, which retailers including Dreams, Blacks and Internacionale have used to survive, are being toughened up with new legislation planned to improve scrutiny of their use, according to the Times.
Now “backstop” legislation is being introduced, giving the Government the option to ban the sale of failed businesses back to the existing management team when the company has been through a pre-pack administration.
In a pre-pack administration, a buyer - sometimes the current owner - is lined up before the business formally appoints administrators and before creditors have been told. It is then plunged into administration before immediately being bought by the suitor, free of debt.
A Government-commissioned report last month found that, although the deals have saved jobs and reduced insolvency costs, many view them as controversial, enabling businesses to offload debts, while unsecured creditors are left out of pocket, despite the business continuing to trade.
There were also complaints the deals put competing, healthy companies at a disadvantage.
But the success of new voluntary measures, such as the creation of an independent panel to scrutinise pre-pack deals, will be recorded before new rules are implemented.
Deputy vice-president of insolvency trade body R3 Andrew Tate said the threat of a pre-pack ban to connected parites was an “unreasonably blunt tool”.
Senior accountant Theresa Graham, who led the review, called for directors to detail how they would successfully run a company that has been rescued via a pre-pack deal, while she said there should be better marketing of the deals to find the best buyer for the job.
Tate supported the recommendations but said a potential ban on sales to connected parties went beyond the report’s proposals.
“The Graham review suggested regulating connected party pre-packs as a last resort; it did not recommend an outright ban.
“Whereas the Graham review, the insolvency profession and creditors recognise that pre-packs have their pros and cons, the proposal is an unreasonably blunt tool.”
A Government spokesman said: “The review into pre-pack administration by Teresa Graham recommended a package of voluntary measures. We expect the voluntary measures to work but will take a power to legislate, to ensure Government can act quickly if needed.
“Government plans to evaluate after three years and would consult before legislating. Implementation of the voluntary reforms will be one indicator of success.”