Review over controversial pre-pack deals is welcomed
The Government has commissioned a probe into pre-pack administrations, in order to assess what steps could be taken to better safeguard the interests of unsecured creditors.
It will explore whether measures can be tightened to allow creditors to be given a grace period to challenge the controversial deals before they go ahead.
A pre-pack is a fast-track administration that avoids a failing business being sold on the open market. An insolvency practitioner instead lines up a purchaser to take over the profitable parts of the business, with the company going into administration simultaneously.
It is argued that the deals can save jobs and bail out businesses with a viable future and, negotiated behind closed doors, offset news getting out that could damage a company's future still further.
Last week, 1,600 jobs were saved after bed retailer Dreams was rescued in a pre-pack buyout. Sun Capital Partners bought the assets of the business, including 171 of the retailer's stores, but with 91 Dreams outlets remaining in administration.
During 2011, industry regulator the Insolvency Service was notified of 723 pre-packs, totalling a quarter of all administrations. Around 85% of these deals were phoenix' sales, where the business is sold to 'connected parties' – usually the existing management. The Insolvency Service said: "Used appropriately, pre-packs can be a highly effective process to ensure the best deal for creditors by better enabling the rescue of businesses, preserving value and safeguarding jobs. Allowing directors to 'have another go' if they are not culpable is an important part of our enterprise culture."
Its review will look into whether self-regulation on the part of the insolvency sector is tough enough, however.
Commercial debt recovery specialist Daniels Silverman's managing director, Carole Hughes, has been critical of pre-pack administration cases, especially where the assets may have been undervalued.
She said: "I have seen the devastating effect this can have on unsecured small business creditors, many of whom lose their own business as a result.
"There is a culture at present which allows debtor companies to avoid their debt and carry on trading by misusing pre-pack administrations. It is the unsecured small business creditors who suffer."
The British Property Federation, which represents the interests of landlords, is among other organisations to also welcome the review.
Its chief executive Liz Peace said: "Landlords absolutely support an entrepreneurial rescue culture, but this must be applied fairly to all sides. Landlords are businesses too – from SMEs on the high street to the giant pension funds and listed companies who invest for our retirement."