Pre-pack figures suggest foul play

New rules relating to controversial insolvency mechanism are being flouted in a third of cases, according to Insolvency Service figures

Eddie Pacey: If you are an unsecured creditor, your position is weaker than ever

Channel watchers have expressed renewed concerns over pre-packaged administrations after figures suggested new rules relating to the controversial insolvency mechanism are being flouted regularly.

The ‘SIP 16’ guidelines were introduced in January to force insolvency practitioners (IPs) undertaking pre-packs to disclose more information to creditors.

Pre-packs are viewed with suspicion because they allow administrators to wipe the debts of distressed firms and sell the business quickly ­ sometimes to the previous owner.

However, figures from the Insolvency Service show that IPs did not fully comply with these rules in 202 (35 per cent) of the 572 pre-packs in the first six months of 2009. Some 17 cases were deemed serious enough to be referred to regulators.

Eddie Pacey, director of credit at distributor Bell Micro, argued that there are still too many pre-packs where IPs are making no effort to maximise returns for creditors.

“If you are an unsecured creditor, your position is weaker than ever,” he said. “My impression is that more than 35 per cent of IPs are not following the guidelines.”
R3, the trade body for IPs, argued that the findings showed that there was no systematic abuse of the pre-pack mechanism by its members.

Peter Sargent, president of R3, said: “The guidance has only been in place for six months and any confusion about the information that needs to be provided will be clarified.”

The Insolvency Service verified that it will strengthen SIP 16 to “ensure it gives creditors what they want”.

Nitin Joshi, founder of advisory service ChannelMoney, said: "Many channel suppliers think [pre-packs] no more than a stitch up or the old-style Phoenix. As long as proper attention is paid to market value then the channel is flexible in how they approach credit risk for the new entity. What the channel despises is insolvency that is deceitfully conceived and orchestrated."