Pre Pack Pool not effective according to MPs
02-May-2017Ministers have been urged to tighten the rules around pre-pack administrations after figures showed that a voluntary system for preventing abuses was largely being ignored.
Only 28 per cent of eligible cases were referred to the Pre Pack Pool in its first 14 months, according to its inaugural annual report.
The pool reviews pre-pack administrations in which companies are sold to connected parties. The process has caused anger among creditors because some directors and rogue insolvency practitioners use it as a route to create “phoenix” businesses, which enable company owners to drop their debts, shed an expensive pension scheme and carry on trading in a new company.
However, the review system is voluntary and responsibility for making referrals to the pool falls on the connected party purchaser, not the insolvency practitioner or creditor.
Frank Field, the Labour MP and chairman of the Commons’ work and pensions select committee, said it was “deeply worrying that three quarters of them are ignoring a voluntary system” and he raised the prospect of the committee scrutinising the pool after the general election.
Sir Vince Cable, the former Liberal Democrat business secretary who is standing for re-election as an MP, said that the rules should be strengthened so that insolvency practitioners were responsible for referring connected party pre-packs to the pool. He said that the pool should move towards making referrals mandatory.
“Pre-packs are a way of keeping businesses going and helping people in work, but we must not allow them to become a scam at the expense of the taxpayer, particularly through the Pension Protection Fund [the industry-funded pension lifeboat for failed companies].”
Sir Vince added that the low number of referrals to the pool raised “worrying questions” because “it is almost entirely around the connected party cases where the worries are and if they are not being referred you worry what is going on”.
The pool is a limited company whose members are “experienced business people”. It is overseen by insolvency practitioner bodies including the Insolvency Service, an agency of the business department. It was launched in November 2015 after recommendations were made in the Graham review, which was commissioned when Sir Vince was business secretary to introduce greater transparency and oversight. It was undertaken by Teresa Graham, a senior accountant.
Ms Graham hit back at Sir Vince’s calls for a mandatory scheme, saying that regulation would “destroy a mechanism that has a legitimate place within the insolvency landscape.
“There is a long way to go before calling this approach a failure and I would urge ministers to avoid jumping on premature bandwagons.”
In its first annual review, the pool defended pre-packs, stating that the process was an “important part of the UK’s restructuring landscape” but one that had been overshadowed by concerns about a lack of transparency, because creditors discovered the use of a pre-pack only after it had taken place. The industry tends to believe that the process attracts a disproportionate level of criticism and attention.
There were 371 pre-pack administrations between November 2015 and January 2016, according to regulators, of which half involved a purchase by a connected party. Of those, 53 were submitted to the pool for review and in six cases the pool ruled that a “case for the pre-pack is not made”.
The pool said that although referrals were lower than expected, the use of the pool accelerated as awareness increased and it “should be seen in the context of falling insolvency numbers since the last recession” and fewer pre-packs over the past five years.
A quarter of administrations were pre-packs in 2011, of which 79 per cent involved a connected party purchase. This fell to 22 per cent and 51 per cent, respectively, in the pool’s first 14 months in operation. The pool also said that only one of the 34 cases in which it deemed a pre-pack “not unreasonable” involved a company that went on to enter another insolvency procedure.
Stuart Hopewell, co-director of the pool, said that making referrals compulsory “might also dissuade owners from proposing any potential pre-pack deals and lead to more sales out of liquidation with no scrutiny, leading to potentially greater job losses than with pre-packs, which are known to preserve jobs”.
He added that creditors should “push for referral and from experience one of the biggest such creditors is government itself in the form of HMRC”.