Pre-pack administration Catch-22 flagged up

A lack of legislative support in pre-packaged administrations has been
criticised, but the effort to draw up rules governing there use has been branded
a ‘minefield’.

The use of pre-packs ­ which find a buyer for a troubled company without the
knowledge of unsecured creditors and before the business officially goes into
administration ­ has risen sharply since a change in the law in 2003.

Under the Enterprise Act 2002 companies no longer need a court order to go
into administration.

Charles Macmillan, partner and head of corporate recovery at accountancy firm
Beever and
, said: ‘Pre-packs are not embodied in legislation but are merely a
process designed and adopted by insolvency practitioners in an attempt to
extract value from very dire situations. The lack of formal legislative support
leaves the process open to both criticism and abuse.’

Macmillan recognised the need for legislation, but said the rules would be
hard to draw up, creating a ‘potentially complex minefield’. His comments come
after MPs grilled Insolvency Service chiefs on the issue last week.

Last month Graham Horne, deputy chief executive of the Insolvency Service,
the organisation which regulates insolvency practitioners, said he expected 100
pre-packs a month during 2009 as the economy worsens. High profile examples of
pre-packs include the Officers Club and Whittards.

There has been growing anger over pre-packs, with critics claiming that
unsecured creditors are less likely to receive any money owed to them and that
the schemes are often an excuse for unscrupulous directors to offload debt

Supporters of pre-packs say they can be the most effective way to quickly
find a buyer for a struggling company, helping to save the company’s reputation
and jobs.

‘Abuse does occur which further sullies the pre-pack product,’ said
Macmillan, although he added that insolvency specialists have raised standards
over the past few decades.

The Insolvency Service has moved to address concerns over pre-packs by
publishing new guidelines, known as statement of insolvency practice 16.

The Institute of Directors has welcomed the introduction of SIP 16. It said
it will continue to look for evidence of any abuses before calling for more
regulation of pre-packs.

In recent weeks tea and coffee retailer Whittards and menswear retailer The
Officers Club, found buyers through pre-packs, but Woolworths and childrenswear
chain Adams could not be saved.

Related reading