MPs call for clampdown on pre-packs

Government officials have left the Insolvency Service with the unenviable task of clamping down on supposed pre-pack administrations abuse, despite claims that the process is working well.

MPs on the business and enterprise committee have panned the department, and practitioners, for not making the controversial process transparent enough. IPs may have to tell creditors a pre-pack may be on the cards for a business before the deal is finalised, if MPs are to be appeased.

This would go against the fundamental tenet of the pre-pack, which is to sell a business without a damaging long-term insolvency process. Telling creditors early in the process could harm IPs’ efforts to keep the sale price from tumbling as soon as the market reacts to the news of a potential administration.

But MPs are adamant more must be done to maintain trust in the insolvency framework. ‘Public confidence in the insolvency regime is being and will be further damaged. Prompt, robust and effective action is needed to ensure that pre-pack administrations are transparent and free from abuse,’ said the committee.

The panel flagged up the belief that SIP 16, the new rule which forces IPs to provide details of their decision in facilitating a pre-pack, will not prove sufficient and favour immediate changes to the law.

The MPs cited the Association of British Insurers’ claim that SIP 16 is ‘a step in the right direction, but only deals with the situation after the pre-pack’.

The ABI added: ‘The government should act to address these problems by, for example, imposing minimum disclosure and transparency requirements’.

IPs claim detractors are not in possession of all the facts. ‘There’s been a lot of publicity about it from people that don’t have a complete understanding of pre-packs,’ said Carl Jackson, head of recovery at Tenon.

Statistics on pre-packs’ effectiveness have so far proved a mixed bag, however. Research from Dr Sandra Frisbee, an academic at Nottingham University, found secured creditors do well in a pre-pack, recovering an average of 42% of debts compared to 28% in a traditional administration.

But the Association of Business Recovery Professionals found evidence that unsecured creditors fare worse during a pre-pack, recovering 1% of their debts on average compared to 3% as part of a standard sale. This has led the committee to put IPs and the Insolvency Service on notice, particularly where the current management buys-out the business in a pre-pack, shedding debts in the process.

It said: ‘Unsecured trade creditors must take a higher priority, especially in “phoenix” pre-pack administrations. The insolvency system, the Insolvency Service and the profession all risk real reputational damage if the situation is not addressed.’

The Insolvency Service is set to publish an eagerly awaited report into the first six months of SIP 16 this June and IPs will be hoping the findings will not prove to be a stick MPs and creditors can use to beat them with.