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Pre-pack changes not enough to prevent “insolvency abuses” say landlords

Landlords have welcomed Government plans to tighten the rules governing pre-pack administrations but have warned they do not go far enough to counteract abuses of the system.

The British Property Federation said today that the reforms would still not give landlords sufficient time to scrutinise so-called “phoenix pre-packs” – where a business is put into administration and then sold to a connected party, which can often be the company’s directors.

The package of proposed reforms, announced by Business Innovation and Skills minister Ed Davey today, will require insolvency practitioners to notify creditors in advance of a phoenix pre-pack and allow them three days to object if they wish. Pre-pack sales whether to connected parties or not are often done at great speed and presented to creditors as a fait accompli, leaving them open to abuse.

However, the BPF argued that three days would be insufficient and have called on ministers to extend this notice period to one week, given the extent of the examination of the business that would have to occur during that period.

Davey also announced other measures that would make pre-packs more transparent, including a requirement for insolvency practitioners to serve a SIP16 notice – explaining why a pre-pack is the best option for creditors – at the time of the administration rather than following it.

Insolvency practitioners would also be required to post SIP16 information at Companies House, again increasing transparency of the decision making process.

Commenting on the proposals, James Anderson, assistant director at the British Property Federation said: “Pre-packs have a place in the armoury of the insolvency practitioner as they are proven to rescue distressed businesses. What landlords absolutely do not want to see is the manipulation of a business rescue system for companies’ commercial gain. The system is most open to abuse in pre-pack sales to connected parties – sales that often occur with limited or no marketing of the business, at speed, and with the sale presented as a fait accompli to creditors.

“Today’s announcement takes steps to improve the system for creditors, which is welcomed. However, more time should be given to creditors for them to analyse pre-pack deals to connected parties. The three-day period is not sufficient in our view, and should be extended to one week.

“We are pleased to see the Government take steps to ensure that information on pre-pack sales is provided to creditors in a timely manner and welcome the proposal to require IPs to serve SIP16 information on creditors at the same time as issuing administration documents. “Many IPs already do this, however, and in order to provide maximum security to creditors, the SIP16 should be placed on a statutory basis which will reach out to those operators that flout the rules.”

ENDS

For further information please contact James Anderson, BPF assistant director, on 020 7828 0104, or at janderson@bpf.org.uk

Patrick Clift, Media and Public Affairs Manager, on 020 7802 0128, or pclift@bpf.org.uk

The Insolvency Service issued the following press release today:

31 March 2011

Edward Davey, BIS Minister with responsibility for the insolvency regime, announces new proposals for dealing with pre-pack administrations

Everyone who is affected by insolvency whether they be employees, individuals struggling with debt, consumers who have lost deposits or suppliers who have not been paid are entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome in what are often difficult and challenging circumstances. 

Today, Edward Davey announced measures that aim to improve the transparency of, and confidence in, pre-packaged (pre-pack) sales in administration cases, and said:

“The merits of pre-pack sales have continued to be the subject of much debate.  I recognise that such sales offer a flexible and speedy means of rescue and can be the best way of maximising returns for creditors.  We do not wish to outlaw them.  But they must be done fairly and reasonably.  Particular concerns have been raised about sales of assets back to the current management, or other connected party, something that is often referred to as “phoenixism”.  Where such sales are at undervalue, creditors get less than they should.  Competitors who pay their debts in full also suffer.  I want to make sure that creditors have a fair chance to have their voice heard.  I also want to enable others to scrutinise such transactions after the event to ensure that deals being struck are fair in the circumstances.

In order to inject greater transparency into the process we intend to require administrators to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets.  This will enable creditors to express concerns, which the administrator would need to consider or, where the circumstances justify it, apply to the court to prevent the sale from taking place.

Administrators already need to provide a detailed explanation of why a pre-pack sale was undertaken to creditors in compliance with professional standard Statement of Insolvency Practice 16.  These will in future need to be included in their administration proposals which are lodged at Companies House, making the information available to business as a whole, including credit reference agencies.   Administrators will also need to confirm that the sale price represents best value for the creditors.”

The Insolvency Service is publishing today a report on the operation of Statement of Insolvency Practice 16 (SIP 16) during 2010.  This follows the publication of previous reports during 2009.  The report examines the extent of compliance with SIP 16 by insolvency practitioners during 2010.  Overall compliance during 2010 has increased to 75%, from 62% in 2009. 

The Insolvency Service has an established and robust investigations process to target and disqualify directors who may have otherwise abused the privilege of limited liability, and has continued to monitor potential conduct matters relating to directors in pre-pack cases reported under SIP16. 

Also published today:-

The Report on the Operation of Statement of Insolvency Practice 16 (SIP16) (1 January to 31 December 2010)

The 2010 Annual Review of Insolvency Practitioner Regulation, March 2011,

Improving the transparency of, and confidence in, pre-packaged sales in administration, summary of consultation responses, March 2011

Ends

Notes to editors

1. The full text of the Ministerial statement can be viewed in the ‘What’s News’ section of http://www.insolvency.gov.uk/

2. The purpose of Statements of Insolvency Practice is to promote and maintain high standards by setting out required practice and harmonising the approach of Insolvency Practitioners to particular aspects of insolvency practice.  They apply in parallel to the statutory framework.  SIP16 sets out what information an administrator must disclose to creditors when executing a pre-packaged sale in administration. The Report on the Operation of Statement of Insolvency Practice 16 (SIP16) (1 January to 31 December 2010) can be viewed at http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/registerindex.htm

3. The 2010 Annual Review of Insolvency Practitioner Regulation, March 2011, can be viewed at http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/registerindex.htm

4. Improving the transparency of, and confidence in, pre-packaged sales in administration, a summary of consultation responses, March 2011 is available at http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/registerindex.htm

5. The Insolvency Service administers the insolvency regime, investigating all compulsory liquidations and individual insolvencies (bankruptcies) through the Official Receiver to establish why they became insolvent. The Service also authorises and regulates the insolvency profession; deals with disqualification of directors in corporate failures; assesses and pays statutory entitlement to redundancy payments when an employer cannot or will not pay employees; provides banking and investment services for bankruptcy and liquidation estate funds; and advises ministers and other government departments on insolvency law and practice.  Further information about the work of The Insolvency Service is available from http://www.insolvency.gov.uk

6. Media enquiries at the Insolvency Service should be directed to: -

Denise Rawls,           Press Office Manager - 020 7674 6910

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