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).