Against the backdrop of recovering economic meltdown, and the plethora of high-profile retail failures, several of which resulted in pre-pack sales (e.g. Whittards, The Officers Club and USC) - is it any wonder that creditors and indeed the public have come to an increasingly cynical view of ‘revolving door’ or ‘cosy’ arrangements between accountants and those who may or may not have been directly responsible for a business’ collapse?
The pre-pack system allows the healthy part of a business that has gone into administration to be sold off quickly, so it can keep trading and paying its staff. Although there’s much publicity about the economy moving out of recession, many companies continue to face threats from landlords, HMRC, the banks and creditors. Directors in construction companies are also facing increasing concerns regarding wrongful trading and their own personal risk. Together with these concerns, are claims that directors of failing businesses sell it to themselves, at a knock-down price, to free-up debts, leaving creditors in the lurch.
The Insolvency Service – which introduced new reporting guidelines for administrators last year, to make pre-pack deals more transparent (SIP 16) – claims that more than 30% of the new SIP 16 reports, administrators are required to draw up are incomplete or missing entirely. It wants to make completion of the report compulsory. Accordingly, new government proposals announced recently, by business minister Ian Lucas, plan a consultation on pre-pack administrations which could see costs in pre-packs increase.
The consultation will look at changing the way pre-packs are conducted and further scrutinise the transparency report, SIP 16. Headline proposals include; mandating SIP 16 which is currently voluntary; allowing the official receiver to investigate the directors and administrators actions; and splitting the insolvency practitioner’s role, by having one to advise, and a separate insolvency practitioner to conduct the pre-pack. Such changes should help to ensure it is a legitimate rescue effort, and not just a vehicle for incumbent management to off-load its debts.