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IPs need tougher sanctions in pre-packs, says BIS

Pre-packs need more transparency, claims a Business Innovation and Skills select committee

06 Feb 2013 Accountancy Age

By Rachael Singh

Insolvency Service

THE INSOLVENCY profession needs tougher sanctions for failing to comply with pre-packs according to a Business Innovation and Skills (BIS) select committee.

A review into the Insolvency Service by the committee highlighted various concerns with pre-packs, most notably they need greater transparency and harsher sanctions.

"Pre-pack administrations continue to cause concern," said the chairman of the Business, Innovation and Skills Select Committee Adrian Bailey MP, adding: "Greater transparency, higher levels of compliance, and a stricter regime of sanctions are needed."

A pre-pack administration is where the sale of the business is marketed prior to the company entering administration and subsequently sold on appointment of administrators. However, the administrators must submit a SIP16 report outlining why the pre-pack was chosen as the best course of action for creditors.

Lee Manning, president of insolvency trade body R3, agreed with the committee's findings. He said: "R3 strongly supports the suggestion of providing feedback to insolvency practitioners where the SIP 16 report has been judged non-compliant, to prevent repeated mistakes."

However, he argues that governing body the Insolvency Service (IS) could be clearer on what is needed to make a SIP 16 report more compliant.

"Insolvency practitioners should be informed of what precisely the IS expects to be included in the SIP 16 report. We believe these changes will produce better SIP 16 compliance and will go some way to improving confidence.

"R3 believes there are further measures which should be introduced in order to boost transparency and confidence in the pre-pack process, such as giving creditors the option to appoint an independent liquidator to examine a connected party sale."

The BIS committee was focused on IS and highlighted various other issues including concerns that the body is under resourced to handle director disqualifications.

Currently all administrators must complete a report (known as a D1) to the Insolvency Service outlining the role the director played in the business running into trouble and whether they should be sanctioned.

IPs have been complaining for years that the Insolvency Service is under-resourced to handle this process.

The BIS select committee has now agreed, stating: "Without an increase in resources the investigations unit will be unable to increase the number of cases it can prosecute which will further undermine stakeholder confidence."

"Any dilution of the enforcement activity would send the wrong message to delinquent directors," it added.

Lee Manning added: "We strongly believe that disqualification rates should increase; ten years' ago 45% of ‘D1 reports' sent to the Insolvency Service by IPs led to a disqualification of a director, today this has dropped to just 21%. An increase in resource, and efficiencies such as electronic reporting would see more ‘delinquent' directors prosecuted, thereby protecting well-run UK businesses." 

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