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. Consequently, ministers have been urged to tighten the rules and make the scheme mandatory to stop any abuse of the pre-pack administration system.
What is pre-pack administration?
A pre-pack administration is a restructuring tool for businesses, providing it with the potential opportunity to carry on trading. The core business itself must be viable for the pre-pack to have any chance at succeeding in turning the business around. The business and its assets will be sold 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 liquidation. It is used when the value of the business (including goodwill) could quickly evaporate. Consequently, this could lead to the total demise of the business, or a worse return to creditors.
Find out everything you need to know about pre-pack administrations
A small pool of applicants
The pre-pack administration Pool was set up in November 2015 after a review conducted by ICAEW member Teresa Graham, commissioned by former Liberal Democrat business secretary Sir Vince Cable, to introduce more transparency with regards to pre-pack administrations.
In its first 14 months, only 28% of eligible cases were referred to the pool for independent review by 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.
During the first year (until 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’.
Negative stigmas
Critics have argued that some directors and insolvency practitioners have misused the system to create phoenix businesses to drop their debts, expensive pension schemes, and 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.
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;
“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.”
In her review, Teresa Graham commented on the findings; saying 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 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 of the potential outcome should referrals 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.”
In summary
The pre-pack pool was set up in November 2015 to introduce more transparency with pre-pack administrations. However, the scheme has seen a very small amount of usage. To minimise the potential for abuse of the pre-pack administration system, ministers have considered making the voluntary scheme compulsory. The lack of applications could be down to the negative stigma attached to the pre-pack administration procedure; creditors may see it as an attempt by the indebted company to create a phoenix business and continue without repaying their debts. The pool will last until 2020, where the sale of assets to connected parties in administration could be banned.