Government considers crackdown on pre-pack administrations

The government is considering a crackdown on the practice of 'pre-pack administrations', which sees businesses that have collapsed, often owing creditors thousands of pounds, re-emerge and trading as normal.

A number of pub and bar operators, including London Town and Laurel Pub Company, have undergone pre-pack administration deals, with job protection often cited as a justification for the move.

However there have been concerns regarding the transparency of such arrangements, with some observers fearing that deals are 'stitched up' in advance by the company, its banks and its administrators. Small unsecured creditors are often left owed thousands of pounds from such deals, money which they are unlikely ever to recover.

The government's decision to launch a consultation on pre-packs came after a report from the Insolvency Service revealed that the rules designed to build confidence in the system - Statement of Insolvency Practice 16 (SIP16) - were not being adequately complied with by insolvency practitioners in more than a third of cases.

Business minister Ian Lucas said: "Pre-packs are a good option for some companies when they get into difficulty as they can preserve value and jobs.

"But I'm very concerned that the appropriate information to justify the pre-pack is not always being provided. It is crucial that business and the public have confidence in the insolvency regime and that pre-packs are being used responsibly and appropriately. We will be consulting as soon as possible on a range of new measures."

Among the measures being considered are: putting SIP16 on a statutory footing with penalties for non-compliance; in the event of a pre-pack the automatic scrutiny of the directors' and administrators' actions by the Official Receiver; making it impossible for the person advising on a pre-pack to become the administrator, and ensuring that pre-pack deals involving connected parties get the go-ahead from court or creditor interests first.

Tim Carter, head of insolvency at law firm Stevens & Bolton said preventing administrators from advising on pre-packs could provide a useful check, "but it will in reality increase the costs of the company and potential cost of the administration to the detriment of unsecured creditors.

"Therefore this proposal may actually be counterproductive and result in 'jobs for the boys'. Indeed this measure may inadvertently encourage behind the scenes deals to be struck."