No 'abuse' of pre-packs, despite complaints

New rules allowing creditors to hold insolvency experts to account for their conduct when arranging pre-packaged administrations ensure there is no ‘wide-scale abuse of pre-packs’, despite complaints.

Statement of Insolvency Practice 16 was introduced on 1 January this year, toughening up the framework governing insolvency practitioners in finding a buyer at the same time the company announced it had collapsed.

The Insolvency Service confirmed that some IPs had been reported for their conduct, but stressed that the majority were maintaining high standards.

‘Although the process for providing more transparency and monitoring reports of complaints under SIP 16 has only been up and running for a fairly short period of time, we have only received a handful of complaints,’ an Insolvency Service spokeswoman said.

‘This supports our view that there isn’t wide scale abuse of pre-packs. If people do have concerns about the way an IP has managed a case they should contact the appropriate regulating professional body or contact the Insolvency Service.’

The Insolvency Service added IPs will still be allowed to handle the process as they see fit because SIP 16 is a retrospective piece of legislation which ensures creditors are informed of what has gone on after the process has been completed.

‘There are no plans to legislate for how insolvency practitioners should deal with the pre-packed sale of a company’s business. The conduct of administrators in relation to pre-packs is best dealt with as a matter of regulation,’ the spokeswoman added.

Pre-packs are disliked by creditors and unions over concerns that the best deal will not be achieved for the company because the sale is conducted behind closed doors, preventing the business from being sold on the open market.

There is also the feeling that management uses the pre-packs as any easy way of shedding the loss- making parts of their company, leading to sweeping job cuts.

But IPs say the pre-pack is an invaluable tool which helps preserve jobs and avoids the problem of keeping the business trading while a parade of buyers look at the company.

To achieve this IPs must secure funding from banks at a time when they are reluctant to bankroll companies.

Carl Jackson, head of business recovery at Tenon, said: ‘Banks are extremely wary about funding business in administration.’

He added: ‘Pre-packs have been around in some form or another since I have been an IP. If they weren’t available, there would be a real problem. There’s no real alternative, but I think it’s part of our jobs as insolvency practitioners to be more up-front.’

As insolvency figures for the first quarter of 2009 showed companies were still under the cosh, Insolvency Service chief executive Stephen Speed fired off a warning shot to any company top brass looking to take advantage of the quick turnaround schemes.

He said: ‘It is important that the public can have confidence that corporate insolvency procedures are not open to abuse.

‘Currently, some seven directors a day are disqualified as a result of investigations conducted by the Insolvency Service. In the last quarter, 59 directors were disqualified for 10 years or more ­ a very serious sanction.’