Pre-pack administrations have proliferated in construction and have been viewed as a way of protecting jobs.
But there have been complaints that directors are abusing the system with creditors too easily short-changed.
With fears rising about a wave of corporate collapses because of Covid-19 the rules are being tightened up.
The new laws will make it mandatory for stricter independent scrutiny on pre-pack sales.
The Government hopes this will improve confidence and transparency in pre-pack administration sales, giving the general public and creditors reassurance that their interests are being protected alongside that of the distressed business.
Minister for Corporate Responsibility Lord Callanan said: “Pre-pack sales play an important role in rescuing viable businesses, while protecting jobs and supporting our economy.
“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-pack administrations involve arrangements to sell part or the whole of a company’s business or assets prior to the company entering into administration.
The sale is completed on or shortly after the appointment of an administrator and the speed of the transaction helps preserve the value of the business while saving jobs.
But trade creditors have raised concerns that arrangements may not always be in the best interests of creditors, particularly where the sale is made to a connected party, such as the company’s directors or shareholders.
Ion Fletcher, Director of Finance Policy, British Property Federation: “We support the Insolvency Service’s proposed measures to require independent scrutiny of sales in administration to a connected person. This will provide much-needed transparency and provide reassurance that a sale has been completed in a fair manner.”
The Government will introduce regulations into Parliament in due course.