MPs seek tighter control over pre-packs
Claims that rules are damaging Britain's economy
A report by the Business and Enterprise Committee says that the entire “pre-packaged” administration rules are damaging confidence in Britain's insolvency regime.
MPs said that, on average, unsecured creditors such as customers, suppliers and shareholders recovered only 1 per cent of their debts during a pre-pack administration, against 3 per cent in a private business sale.
In its report on the insolvency regime, the Committee concluded that unsecured creditors of companies undergoing pre-pack administrations were “initially kept in the dark and then left empty-handed”, that phoenix buy-backs caused “particular outrage”, and that many small to medium enterprises were suffering “unreasonable financial harm” as a result of pre-pack administrations.
But TMA (UK) Director Justin Stephenson, a partner in London law firm Jeffrey Russell Green, said the Committee had only cited “anecdotal media reports and confidential letters” to support its conclusions, and that harder evidence was needed to justify its assessment of the scale of the problems associated with pre-pack administrations.
Mr Stephenson said that evidence from researchers at Nottingham University, cited by the Committee, showed that secured creditors got a far better return from pre-pack administrations than from private business sales – 42p in the pound rather than 28p. Unsecured creditors did get a lower return of 1p in the pound rather than 3p, but TMA did not see that to be significant as unsecured creditors received very little whether the administration was pre-packed or not.
“Yes, there have been occasions when pre-packs have been abused, but legal powers already exist to strike off directors and disqualify insolvency practitioners involved in such cases,” he said.
“And neither these abuses nor the small disadvantage to unsecured creditors alter the fact that pre-packs can be a very valuable tool in the right circumstances to save businesses and jobs and minimise losses to secured creditors. Saving viable businesses must be the ultimate goal for the greater good of UK plc.
“The Committee's criticisms overstated the problems and glossed over the fact that the administrator's role is to recover as much value as possible as quickly as possible, and if a pre-pack is the most effective and appropriate way of achieving it then that is the option the administrator ought to select.”
Mr Stephenson added that the Committee's recommendation – to take no action, but to monitor closely the effectiveness of SIP 16 – vindicated TMA (UK)'s criticism of its conclusions.
The number of directors banned by the Insolvency Service for improperly creating “phoenix” companies rose by 67 per cent last year over the previous 12 months.
Referring to the recent adoption of SIP 16, the committee said: “If this does not prove effective, then it will be necessary to take more radical action, possibly by giving stronger powers to creditors or the court.”
Peter Sargent, who recently took over as president of R3, said: “As yet, there has been no evidence of any systematic abuse of pre-packs and there are clear benefits in pre-packs for saving jobs.”
Do you think concerns over pre-packs are justified or are MPs just pandering to public opinion? Have you seen a dodgy prepack? Comment below (completely anonymously).
Comments What do you think?
Anonymous | 14:28 11 May 2009
Anonymous | 15:15 11 May 2009
PrePacks do not create bad debts and Insolvency Practitioners have nothing to gain from being "in league" with profligate Directors.
As the janitors who clean up the detritus left in the wake of this country's economic decline, Insolvency Practitioners are an easy target for criticism, having a limited range of medicaments (prescribed by Parliament) with which to treat a host of illnesses.
Pre Packs were developed as a creative response to a situation that was otherwise without an adequate remedy.
SIP 16 and BERR's close scrutiny of Pre Packs are positive developments that will, hopefully, curtail this seemingly tireless "witch hunt".
Anonymous | 15:21 11 May 2009
Often third party buyers are put off by employee liabilities that transfer due to TUPE. Further, often the Directors are the best placed to buy the business (particularly in a service industry) or the only parties likely to want to buy the business. Prepacks retain the value of goodwill and save jobs.
Anonymous | 16:32 11 May 2009
Anonymous | 18:38 11 May 2009
The sad truth is that companies that are pre-packed would go bust anyway, pre-pack or not. Having spoken to many trade suppliers, the main gripes are that as well as losing money, they only find out about a sale after the event. If its sold to the old management, they see it as unfair that people can drop debt in the morning and continue in the afternoon.
Creditors find it difficult to accept that they are unlikely to have received any more of a dividend if there was no pre-pack. More often than not, it is not viable to trade on a loss-making business in the hope that a better price can be fetched in the open market (particularly where trading losses are funded by dissipating existing assets such as cash or book debt receipts) when a pre-pack offer is on the table.
I do not believe a huge amount of weight ought to be given to the views of unsecured creditors when Dr Frisby's research for R3 shows that the difference in return to that class of creditor is minimal. Surely more weight should be given to those that the research shows pre-packs affects most - preserving the jobs (and TUPE rights) of employees and enhancing the return to secured creditors.
Perhaps the suggestions that CVA finance may one day attain "super-priority", as in the US Chapter 11 process, will reduce pre-packs. However this will not resolve the problem that an IP accepting funding from somebody to allow a period of trading to market the business is unlikely to fetch a materially greater price in 99.9% of cases, yet will still dissipate the assets in order to repay the priority funding.
Pre-packs are a useful tool to extract maximum value in a damage-limitation scenario. People should also remember that IPs are regulated, licensed and accountable and that as Administrators have a statutory duty of care to all creditors (even if they are not projected to receive any dividend) therefore ought to be allowed to work within the system to make the best of a bad situation.
Anonymous | 08:56 12 May 2009
Anonymous | 09:20 12 May 2009
Polly Peck | 09:40 12 May 2009
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