Insolvency Service promises a hard line over pre-pack abuse

Insolvency Service chiefs have told MPs that they will crack down on insolvency specialists who abuse controversial pre-packaged administrations as the number of company failures soars during the recession.

Amid growing criticism that pre-pack administrations are secretive, lead to more job losses and give unsecured creditors a raw deal, the Insolvency Service’s chief executive Stephen Speed and his deputy Graham Horne, faced some tough questioning by MPs on the business and enterprise select committee.

They said the Insolvency Service would use new rules ­ known as Statement of Insolvency Practice (SIP) 16 ­ to police pre-packs.

‘We’re going to be proactively policing SIP 16 statements to see that administrators have behaved in the right way and that directors have behaved in the right way,’ said Horne.

Insolvency practitioners who are judged to have broken the new rules could be disciplined.

MPs on the business and enterprise committee demanded to know what safeguards were in place to ensure the speed of pre-packs did not disadvantage unsecured creditors.

Speed conceded that there was a grey area in the operation of pre-pack administrations, where a deal is done quickly to sell an insolvent business with the consent of secured creditors. ‘We’re still learning about them,’ he said.

Speed said there was a lot of misunderstanding about how pre-packs operate, particularly their effect on unsecured creditors.

‘There’s a considerable amount of confusion about the position of the unsecured creditors [among the public],’ he said. ‘There is an idea that somehow pre-packs are prejudicial to them, but unsecured creditors are going to lose anyway.’

Recent high-profile pre-pack administrations have made headlines and increased pressure to crack down on pre-packs.

Sir Tom Hunter, the owner of clothing retailer USC bought the company back out of administration, but he only purchased 43 of the 58 outlets. And Officers Club chief executive David Charlton bought back 118 of its 150 menswear stores; the shutters came down on its 32 other sites.

Asked whether he expected another surge in company failures this year, Speed said: ‘Should cases rise by 40%, we can cope. My own feeling is that this is unlikely to happen, not least because the levels we are dealing with are already at a historic high. We have seen the highest levels of bankruptcies on record.’

Experts have predicted that the number of pre-packs will continue to rise sharply this year as businesses struggle to get credit from banks.

Peter Luff, chairman of the Business and Enterprise committee, said that pre-pack administrations would remain under the spotlight during this year.

Committee member Lembit Opik, accused insolvency practitioners of earning ‘extortionate’ fees, but Speed said ‘highly trained’ experts were worth the money.

Further reading:

Financial Director's in-depth analysis of pre-packs