Danny McCance 3 May 2017 02:34pm

Debate over mandatory pre-pack pool referral

The voluntary system for preventing abuses of pre-pack administration rules is being underused, according to the first annual review of the process

The former business secretary Vince Cable is now calling for referrals to the pool to be made mandatory.

The pool is a voluntary process for connected parties purchasing a company’s business or assets through a pre-pack administration. It is also an opportunity to assure creditors that the sale has been reviewed by independent business experts and that the case for a pre-pack has been made.

The Pre Pack Deals report 2016, covering the year to December 31 2016, found that of the 1,689 administrations during the review period, 371 were pre-pack deals. Of these pre-packs, over half (51%) were connected party purchases – where an entity connected to the insolvent companies purchases its business or assets.

More than a quarter (28%) of eligible pre-packs were referred. During the period, 53 referrals were made to the pool.

Of the 53 referrals to the pool, six received a "case for the pre-pack is not made" opinion given to them.

Cable called for making referrals mandatory, suggesting that the figures raised “worrying questions”, according to a report from The Times.

“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," he said.

However small business guru and ICAEW member Teresa Graham, whose review of pre-packs led to the pool being launched in 2015, considers this alarm to be rather premature.

Graham suggested that those reacting negatively to the news should take a more holistic view of the information.

“There has been a significant drop in administrations per se, and pre-packs as a percentage of those have also so. The number of pre-packs with a connected party purchase has fallen from 79% in 2011 to 51% now.”

In 2014 there were there were 728 pre-pack deals, accounting for 29% of all administrations. This has dropped to 371 pre packs in 2015-2016, 22% of administrations.

“I would look at those numbers and say, well it’s not just the 28% that’s gone in to the pool but how many haven’t even bothered… How many of the ‘nasty’ pre packs out there thought 'the game is up, we just won’t bother?’”, Graham said.

“I see a lot more positives behind some of the numbers we see here.”

Graham provided further recommendations on the next steps.

“What needs to happen now are two things from the recognised professional bodies (RPBs). They should be using the success and the testimonials to encourage the people they regulate”, she said.

The other thing that Graham wanted to see was a review of the SIP16 – the form that the insolvency practitioner must send to their (RPB) after any pre-pack administration – to see if they have improved since her review. If not, she said, the RPBs should demonstrate how they plan to improve them.

“It’s 14 months in, we’ve got until 2020… Why would I have given them five years if I thought 80% of pre packs would go to the pool in year one?” Graham ventured.

“I think people just have to be realistic, they have to read the report properly and alongside the report the RPBs need to be doing a lot more than they’re doing… If not there won’t be any connected party pre-packs in 2020”, added Graham.