Pre-packaged (pre-pack) administrations should not been banned but should be scrutinised more closely, a government-backed report has concluded.
Teresa Graham, who was commissioned to carry out the wide-ranging report last Autumn, has proposed voluntary - rather than legislative - scrutiny of the controversial practice after concluding pre-packs can save jobs and cut insolvency costs.
Some 600 of the 2,365 UK firms that went into administration last year were subject to pre-packs, a practice that has at times enraged creditors and solvent competitors operating in the same market.
Pre-packing involves the failed business being sold by the administrator at or soon after its appointment, often to the existing directors, with negotiations taking place behind closed doors beforehand without creditors' knowledge.
Graham admitted she had begun her review with "negative perceptions" about pre-packs but stressed her recommendations were based on hard evidence. This included research based on a "large sample" of pre-packs from 2010, carried out by the University of Wolverhampton.
Graham, a senior accountant who bills herself as a "de-regulator at heart", made just six recommendations, including that a new "pre-pack pool" be created to scrutinise pre-packs brought before it on a voluntary basis. This system would only examine deals where there is a "connected party" involved, such as a director of the failed firm.
Any connected party should also have to complete a "viability review" of the new company, Graham recommended, albeit again on a voluntary basis.
"Should these measures fail to have the desired impact and they are not adopted as I would hope by the market, then government should consider legislating," she said.
Based on her research's empirical evidence, Graham concluded that pre-packing can boost jobs, are cheaper than downstream insolvency methods and may bring some "limited benefit" to the overall UK economy.
Giles Frampton, president of insolvency trade body R3, welcomed Graham's findings, arguing that debate around pre-packs has long suffered from a lack of empirical evidence.
"As the report says, pre-packs can help save jobs and do provide benefits for creditors too," it said. "The report will help dispel some of the myths that exist around the pre-pack procedure."
However, the report also upheld some of the key concerns cited by critics of pre-packs, including the lack of transparency around the process. The marketing of pre-pack companies for sale is "insufficient", Graham added, with her research's evidence showing that where no marketing is carried out pre-packs return less money to creditors.
More must be done to explain the valuation methodology, Graham added. Independent valuations were conducted as part of the pre-pack process in 91 per cent of cases studied, however these appear to be "desktop valuations" only, she said.
The research also found that the viability of the new business emerging from the pre-pack is "a concern" for suppliers. Despite this, there is currently no requirement for the insolvency practitioner to consider this, something Graham said should be addressed.
"My conclusion based on this evidence is that there is a place for pre-packs in the UK's insolvency landscape - I do not recommend the banning of pre-packs," she said. "The benefits that pre-packing brings to the UK's insolvency framework mean that reform of the process is worthwhile. There could - and should - be some major improvements to how they are administered."
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