In a consultation yesterday, Business Minister Ian Lucas put forward new initiatives designed to strengthen the laws surrounding the use of ‘pre-packs’. 

A legal and fairly common practice, pre-packs are where the sale of a business, and the assets of an insolvent company, is arranged prior to the onset of formal insolvency and effected immediately on the administrator’s appointment.

The reaction follows a recent report issued by the Insolvency Service revealing that, in one in three cases, insolvency practitioners are failing to comply with the industry’s own rules on transparency.

Lucas said: “Pre-packs are a good option for companies in difficulty as they can preserve value and jobs. But if business and the general public are to trust the process, it must be transparent.

“That was why rules were introduced a year ago to ensure prompt and valuable information was given to creditors. But this is still not happening in all cases.”

Pre-packs are often associated with ‘phoenixing’, and both processes have been criticised as being similar means to offload bad debt.

Critics of the process argue that when a company ‘phoenixes’ it creates a new firm that takes on the good assets, leaving the failing company free to have unsecured debt written off.

The consultation’s report, issued by the Department for Business Innovation & Skills (BIS), outlines concerns amongst creditors: “Much of the concern is voiced by unsecured creditors who perceive the procedure as not transparent, given that negotiations for the sale take place before the company goes into administration and usually without overt marketing of the assets.

“Unsecured creditors have concerns about their inability to have any influence on the process before the sale takes place, and that sales, particularly to the same management team, may be at an under-value.”

The report also highlights the frustration felt by competitors who feel that the purchaser “obtains a competitive advantage, having ‘dumped debts’ and consequently reduced their costs.”

Earlier this year, commercial lenders, Mathon Finance Ltd, went into administration. In a press release issued by the administrators, Pannell Kerr Foster (PKF), the lenders confirmed they had paid all secured debt and had sold their remaining assets to Juniper Property Finance Company Ltd.

Juniper Property Finance doesn’t appear to have a website or a listed telephone number and occupies the same address as Mathon did previously.

However, both Mathon and the administrators, Bryan Jackson and Anne Buchanan, maintain that all secured debt was paid and that all creditors will be paid. Jackson said: “The outcome of this administration is that all of the creditors will be paid and the employees have kept their jobs.”

Why is it then that pre-packs have such a bad reputation? Tony Costigan, Managing Director of Pheonix Company Consultants, specialises in company recoveries through pre-pack deals, and has negotiated over 150 in the last 17 months.

Costigan believes the bad press pre-packs receive is unfair: “In most cases the directors have personally lost substantial sums of money as they have continued to support the failing company way beyond their own financial means. 

“Families suffer when a company fails, despite jobs being saved, the charges and personal guarantees given by directors – often involving their wives and where their homes are at risk – are then called upon by the secure lenders to have the outstanding balances paid. 

“These negotiations will ultimately result in the directors agreeing a payment plan with the lenders over a prolonged period of time, in most cases years.”

In defence of the system, Costigan argues that unsecured creditors can call upon and challenge the Insolvency Practitioner to investigate their concerns if necessary, leading to the formation of a creditors’ committee, which ensures unsecured creditors get a fair hearing.

“The general perception of pre packs by the unsecured creditors is that they are disadvantaged by the system; directors of a failing company can simply move to the new company and trade on, debt free, with no visual impact whatsoever. This is far from the truth.” Costigan added.