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Attempts to avoid pre-pack administration abuse underused

The inaugural annual report from the Pre Pack Pool on its first 14 months found that less than a third of pre-pack administration cases were being referred to the voluntary scheme. As a result, ministers have been urged to tighten the rules and make the scheme mandatory to stop any and all abuse of the pre-pack administration system.

A pre-pack administration is a restructuring tool for your business which can provide it with the opportunity to potentially carry on trading. The core business itself must be viable in order for the pre-pack to have any chance at succeeding in turning around the business.

In a pre-pack, the business and its assets will be sold on at market value to the current directors/shareholders or a third party. The purpose of a pre-pack is to quickly turnaround the business and protect it from creditor threats which could otherwise force the company into some form of liquidation.

It often is used where the value of the business (including goodwill) could quickly evaporate, with contracts potentially being lost, credit stopped and staff departing at short notice if wider notice were to be given. The consequence could be the total demise of the business and / or a worse return to creditors.

In its first 14 months, only 28% of eligible cases were referred to the pool for review by independent business experts. The pool is overseen by insolvency practitioner bodies, including the Insolvency Service, and it exists to review pre-pack administrations where the business is sold to a connected party. However, the system is voluntary and currently only the purchaser from the connected party is responsible for referring the case.

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From the year to 31st December 2016, there were 371 pre-pack administration deals with half being purchased by a connected party. However, only 53 cases were submitted to the pool and in six of the cases the pool ruled that a ‘case for pre-pack is not made’.

Pre-pack administrations are viewed negatively by some and they have caused anger amongst some creditors in the past.  It has been argued by critics that some directors and insolvency practitioners have misused the system to create a phoenix business in an attempt to drop their debts and expensive pension schemes as well as being able to carry on trading in a new company.

Labour MP and chairman of the Commons’ work and pensions select committee, Frank Fields, said that is was deeply worrying that so many are ignoring a voluntary system. Former Lib Dem business secretary, Sir Vince Cable, backed up Mr Field’s sentiments by commenting that rules should be strengthened so insolvency practitioners would also be responsible for referring these cases to the pool.

He spoke to The Times about the findings in the report, he said; “Pre-packs are a way of keeping businesses going and helping people in work, but we must not allow them to become a scam at the expense of the taxpayer.”

The pool was set up in November 2015 after recommendations from senior accountant, Teresa Graham, in her review commissioned by Sir Vince to introduce more transparency with regards to pre-pack administrations.

She commented on the findings and said that calls for a mandatory scheme are premature as regulation would “destroy a mechanism that has a legitimate place within the insolvency landscape.” She called for a more holistic view of the information found from the first 14 months and she suggested using testimonials from successful cases to encourage people to regulate.

She also suggested a review of the form an IP sends to their regulatory body after a pre-pack administration, a SIP16 form, to see if improvements have been made since her initial review. The pool agrees that it is premature to call for changes to make the scheme mandatory and they defended the pre-pack process calling it an “important part of the UK’s restructuring landscape”.

Stuart Hopewell, co-director of the pool, warned about the potential outcome should referrals to the pool become compulsory. He said it “might dissuade owners from proposing any potential pre-pack deals and lead to more sales out of liquidation with no scrutiny, leading to potentially greater job losses than with pre-packs, which are known to preserve jobs.”

Ms Graham gave the pool until at least 2020 to start to make real change towards getting 100% of connected party pre-packs referred to them for independent review. Although, numbers of referrals are low currently, there are three more years in which to improve not only the number of cases being reviewed but also people’s perception of pre-pack administrations.

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