‘Pre-pack’ deals like the one that this week saved defunct law firm Cobbetts face new scrutiny, following a critical report by MPs.
The Business, Innovation and Skills (BIS) Commons Select Committee this week said pre-pack administration deals, where the sale of an insolvent company is agreed before it goes into administration, are not transparent enough to unsecured creditors.
It called for stronger penalties against companies using pre-pack administration deals to relieve their debt.
In its report on the Insolvency Service the select committee said it had heard evidence that the system was open to abuse by so-called ‘phoenix’ deals, where an insolvent company apparently reforms while escaping its liabilities. There is no suggestion of impropriety in the Cobbetts/DWF transaction.
The report calls for the BIS department to research the evidential basis for pre-pack administrations.
It also wants tighter regulation of the Statement of Insolvency Practice 16 (SIP 16), created in 2009 by the Solicitors Regulation Authority, after hearing claims that the system was open to abuse.
During its evidence session, the Association of British Insurers told the committee there was a ‘serious conflict’ inherent in an insolvency practitioner devising a pre-pack sale in secret with the directors and secured lenders of a failing company, then acting as administrator in the best interests of all creditors.
Despite the professional and legal rules designed to prevent abuse, the Institute of Credit Management added that pre-packs were ‘simply used as a vehicle to allow the rise of a phoenix company that has absolved itself of debts and continues to trade’.
But there was support for the current regime from several witnesses who said the arrangements could ensure jobs are saved and ensure a better return for creditors than a normal business sale.
The Institute of Chartered Accountants in England and Wales found ‘no real evidence’ of a flaw in the process, adding that a sale back to existing management was not in itself indication of misconduct or malpractice.
John Milsom, chairman of the Joint Insolvency Committee, which has representatives from several industry bodies, said: ‘If you are looking for effective economic recycling of assets and the preservation of jobs, pre-packs are generally a good thing.’
The select committee agreed that SIP 16 should stay in place, but said the rules should be amended to impose tougher penalties on those who do not comply or are not transparent enough.
The report added: ‘Issues remain with pre-pack administration, which need to be addressed. Greater transparency, higher levels of compliance with SIP 16 and a stricter regime of sanctions are needed.’