IPs praised on pre-packs, but must do better: Insolvency Service

A study probing the first six months of a drive to ensure creditors are given
adequate and timely updates about pre-packaged administrations has called for
the rules to be beefed up.

Statement of Insolvency Practice 16 was rolled out at the beginning of the
year to make the controversial process more transparent. Pre-packs find a buyer
for a company in secret, before announcing the company has collapsed alongside
news of the sale.

The Insolvency Service report praised insolvency experts for their overall
efforts to shed light on pre-packs, but also promised to tighten up the SIP 16
framework after identifying issues.

Instances of statements being issued to creditors late, described as
‘unacceptable’, missing details of a valuation or marketing exercise and leaving
out details of a connection between the insolvent company and the purchaser of
its business were all red- flagged by the regulator.

Graham Horne, the deputy chief executive of the regulator said, ‘Insolvency
practitioners have generally been positive in their approach to the SIP and its
aims, although there is still a fair way to go to ensure that creditors receive
the information they need in a timely manner. We will be looking to strengthen
SIP 16 to ensure it gives creditors what they want. ‘

The Insolvency Service reviewed 572 SIP 16 reports. 65% were fully compliant
with the disclosure requirements of the SIP. 32% were not fully compliant, while
3% of the cases reviewed were referred to the insolvency practitioners’
authorising bodies.
Pre-pack detractors claim existing management establish ‘phoenix’ companies
after buying back the better performing parts of the business, leaving behind
the less profitable sections. This reportedly disadvantages suppliers and
landlords who only discover the pre-pack has been done after it has been
completed.

But insolvency experts have been quick to highlight the fact the study shows
most IPs are fully compliant with the regulations.

Peter Sargent, President of R3 said: ‘Despite popular concerns about
pre-packs being a “stitch-up”, it is clear from these findings that there is no
systematic abuse of the procedure as far as insolvency practitioners are
concerned.’

R3 said that in red-flagging the 32% of cases that were not fully compliant,
the Insolvency Service pointed out that ‘failure to disclose did not, in itself,
imply a “lack of good faith or failure to act in the interest of creditors” and
that apparent non-compliance may be “attributed to early differences in
interpreting the requirements of the guidance.”‘

‘The guidance has only been in place for six months and we are confident that
any confusion about the information that needs to be provided will be clarified
as the guidance beds-in.’

In the 3% of cases where an IPs conduct has been referred to the regulators,
R3 urged regulators to investigate, and deal with any deliberate wrong-doing.

‘Pre-packs are a very misunderstood insolvency tool and the benefits, for
example, the numbers of jobs saved, are often lost in concerns over the impact
on unsecured creditors. In order to build more confidence in the procedure, it’s
vital that any misuse is weeded out and dealt with appropriately,’ added
Sargent.

Mike Jervis, business recovery partner at PricewaterhouseCoopers said:

‘We welcome the findings of the Insolvency Service on pre-packs and it is
interesting that only one in four administrations uses a pre-pack mechanism….
‘We are pleased to note that the report states that the “introduction of SIP 16
does improve transparency for creditors and, properly applied, the SIP will
ensure creditors receive the information they need to decide whether any given
pre-pack sale was in their best interests.”‘

‘The report is particularly relevant as we have completed our own analysis of
last quarter’s insolvency figures and it shows that 4,966 companies entered into
insolvency in the last three months – a massive 44% increase on the same quarter
last year.

‘Therefore it is vital that creditors have sufficient information available
to them to have the confidence that pre-packs have been undertaken in their best
interests.’

For more go to

insolvency.gov.uk

or
r3.org.uk

or PricewaterhouseCoopers