Action to clean up pre-pack insolvencies has been demanded in a Commons report warning that failure to act as the number of administrations soars could mean that ‘public confidence in the insolvency regime will be damaged’.

The MPs welcomed the introduction of statement of insolvency practice 16, aimed at increasing transparency, and the Insolvency Service’s commitment to monitoring it, and warned that, if this fails to address concerns, ‘it will be necessary to take more radical action’ including stronger powers for creditors.

The view comes from MPs on the Commons business and enterprise committee, who also warned: ‘The insolvency system, the Insolvency Service and the insolvency profession all risk real reputational damage if the situation is not addressed.’

MPs said that the result of deals arranged before a business enters insolvency must be made more transparent and free from abuse.

They said they were concerned that unsecured creditors tend to be kept in the dark and recover less than they would under a normal administration.

They added: ‘Pre-packs of this kind fuel understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners. The interests of unsecured trade creditors must take a higher priority.’

And they urged large creditors, including HM Revenue & Customs, to be active in rooting out abuse.

The report also raised concerns about insolvency practitioners’ remuneration, ‘perceived as unduly high by creditors’, and the ability of the system to cope with soaring numbers of administrations.

Committee chairman Peter Luff, a Tory MP, said: ‘We need a regime that stops the abuse of pre-pack administrations, protects creditors from unduly high fees from insolvency practitioners and in which those who try to cheat the system know that they will be found out.’