THE GOVERNMENT has announced it will review the use of heavily-criticised pre-pack administrations.
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.
The insolvency process has been criticised because creditors are usually left out of the loop until the sale has taken place. In some instances a supplier that is owed money does not realise a pre-pack has taken place until they contact a company to chase payment. As with all administrations, the debt held by a company is usually reduced when it enters an insolvency process.
For example a company could have debts of £1m but the new owner is only willing to pay for £500,000 of those debts. However, £500,000 can be seen as a better alternative to a company being forced to wind up because there are no other buyers.
Various concerns regarding pre-packs were announced by the Business Innovation and Skills (BIS) select committee when it reviewed the governing body the Insolvency Service earlier this year. The committee claimed that there needs to be harsher sanctions on abuse by insolvency practitioners and that there is a need for greater transparency.
“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.”
This is the first time that a review on the insolvency process alone is due to take place. Other reviews have involved the Insolvency Service or the profession as a whole.
A statement from the Insolvency Service regarding the upcoming review said: “The government has listened carefully to the concerns of creditors about pre-packs and that is why we already have measures in place to increase transparency and prevent abuse. Strengthened measures are being introduce to improve the quality of information insolvency practitioners are required to provide on pre-pack deals and we are using targeted monitoring of outcomes to assess whether there is evidence of abuse.
“Used appropriately, pre-packs can be a highly effective process to ensure the best deal for creditors by better enabling the rescue of businesses, preserving value and safeguarding jobs. The independent review announced by the minister will enable further evidence to be assembled on how pre-packs are working in practice and whether further steps are needed.”
A timescale of the review will be announced when the review is launched in late spring.
Lee Manning, president of insolvency trade body R3, said: “R3 welcomes the independent review of pre-packs and believes government can do more to increase the transparency of what is an extremely useful business rescue tool. We recognise the concerns from within the creditor community about the pre-pack process… and we hope this review will help to increase confidence in the regime and highlight the vital role pre-packs play in saving businesses and jobs.
“Pre-packs fare considerably better than alternatives in terms of the retention of jobs and returns to secured creditors. This is crucial during the current sluggish recovery. If the economy is to deliver sustainable growth it will need entrepreneurship and to give viable businesses a second chance. We must make sure that any changes do not risk crippling this useful and effective process.”
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