Pre-pack administrations are continuing to side-step measures to stop the abuse of the current insolvency system, according to new research by Moore Stephens.
Just 23 pre-pack sales were referred for scrutiny in 2017 by the Pre-Pack-Pool, the independent review body designed to help stamp out abusive pre-packs – down from 49 in 2016. A pre-pack administration is where a failing company agrees to sell its assets to a buyer before an administrator is appointed to facilitate the sale. The concern is, however, that “pre-packs” are being used by the directors of failing companies to set up a deal to benefit them at the creditors’ expense.
The Pre-Pack Pool looks at the sales of businesses to connected-parties (people already associated with the failing company, including its directors). Half of the 371 pre-pack administrations between November 2015 and January 2017 involved a purchase by a connected party.
The decline in referrals to the Pre-Pack Pool comes against a backdrop of a 4% annual increase in the total number of corporate insolvencies in 2017 from 16,545 to 17,243.
Moore Stephens says that despite the bad reputation, phoenix pre-pack administrations can, when done correctly, give businesses a second chance to succeed and save jobs. The process, however, remains controversial, as it enables creditors and underfunded pension schemes to be offloaded by management who then go on to run similar businesses.
Members of the Pre-Pack Pool had stated that they expected the number of pre-pack sales referred to them would increase from the 49 in 2016. However, the fall that occurred suggests the connected-party purchasers of the business concerned have become increasingly wary of opening these deals up to examination.
Brendan Clarkson, Head of National Creditor Services at Moore Stephens, says: “It is disappointing that even fewer phoenix-type pre-pack sales are putting themselves up for independent scrutiny. The fact that the Pre-Pack Pool is still being woefully underutilised can only be bad news for wider confidence in the pre-pack process and the creation of phoenix companies. Pre-packs and the resultant phoenix companies can offer a viable way forward for a business, but all too often they are seen as being a way of gaming the system and ridding a failing business of its liabilities.”
“If the same management are going to get a second chance at running a failed business, then it seems reasonable that the Pre-Pack Pool is given oversight of the process.”
Moore Stephens says that there have been no changes in market trends that would explain the sharp decline in overall pre-pack deals and subsequent precipitous decline in pre-packs being reported to the pool.