Credit management and collections company Daniels Silverman is calling for tougher legislation to prevent directors from repeatedly abusing pre-pack administrations to avoid debt, as the latest measures announced by Edward Davey, minister with responsibility for insolvency, will fail to protect creditors.
Carole Hughes, managing director, Daniels Silverman, says: “The proposed measures such as the three day warning to creditors that a pre-pack sale is imminent are inadequate and would do little to prevent unscrupulous directors building up debts and then exploiting the pre-pack system to avoid paying creditors.
“We believe the misuse of pre-pack administrations is out of control and tougher legislation is needed to address the growing number of dubious “phoenix” companies that repeatedly fail, costing creditors huge sums of money.”
Daniels Silverman is calling for:
- Statutory force to be given to the Statement of Insolvency Practice (SIP 16) and the introduction of penalties for non-compliance
- More stringent rules under SIP 16 where directors have been involved in one or more pre-pack administrations
- Tougher scrutiny by the Insolvency Service against potential rogue directors
- A clampdown on Insolvency Practitioners (IPs) marketing pre-packs as a way for directors to avoid their debts
“Creditors are being misled into accepting pre-packs as they believe they have no other choice. While we welcome the proposals, they do not tackle directors who abuse the system.
“The Government’s Statement of Insolvency Service (SIP 16) has failed and needs to be given statutory force, so it is properly interpreted and complied with. Under these rules the IP is supposed to explain to creditors the full background of their appointment and why they believed the pre-pack was the best way forward. They have to reveal the name of the purchaser and the price paid and a minimum of 17 key pieces of information such as marketing activities, names of rival bidders and valuations received. However, these act as guidance only and the Insolvency Service’s own monitoring of SIP reveals large numbers of cases that were not compliant.
“As a result of the Insolvency Service’s failure to police the industry some IPs are actively encouraging the use of pre-packs and are failing in their duty to consider the interests of creditors. Legislation is needed to clampdown on these IPs who advertise pre-packs as a “choice” in order to write off debt and continue business as usual.”
Daniels Silverman’s recent insolvency survey among SMEs found that a massive 96% of businesses believe that insolvent companies should not be allowed to escape debts by transferring assets to a new company.
Notes to editors
Current legislation
The Insolvency Act 1986 brought in administration and over time IPs created the term pre-pack. A pre-pack is the process of selling the assets of a company immediately after it has entered administration. It is sometimes the case that the previous directors or management purchase the assets of the company from the administrator and set up a new company.
This process has advantages in that it enables the administrator to realise a greater amount for the assets due to business continuity and the goodwill of the company are preserved. The employees of the company are also usually transferred to the new company preserving jobs.
The Enterprise Act 2002 allowed IPs to form pre-packs without going to court. It made substantial amendments to the administration procedures for failing companies. The purpose was to enhance the policy of creating a “rescue culture”, so that insolvent companies so far as possible should be saved, before their assets are stripped and distributed to creditors.
SIP 16 was introduced in January 2009 providing Insolvency Practitioners with a code of practice governing their activities in supervising a pre-pack administration. It was designed to make the process more transparent for creditors and to ensure that fair value was obtained for the assets. However, Daniels Silverman believes this system is open to abuse and:
- More stringent rules are needed to prevent “serial pre-packers” where Directors who have already been involved in one or more pre-packs are able to continue entering into pre-pack administrations without consequences
- Urgent reform is needed to clamp down on IP’s actively selling pre-packs as a way to avoid their debts
- The Court’s ability to disqualify directors of insolvent companies for a period of 2 – 15 years, if their conduct in the period leading to the insolvency proceedings is considered to be unfit, should be used more often.
- The meaning of proxy forms and proof of debt forms should be made clearer so creditors know exactly what they are signing and agreeing to – currently many creditors are not aware that by signing proxy forms they are providing acceptance for pre-packs.
- More creditor involvement is needed. Creditors should be advised earlier in the process and have more say in the final outcome. Particularly if one creditor accounts for 25% or more of the company debts outstanding, or for debts more than 20% of the company’s annual turnover.
Under the Freedom of Information Act Daniels Silverman has put in a request to the Insolvency Service for responses to the following:
1. The number of pre-pack complaints filed to the Insolvency Service other the last 12 months
2. What was the nature of these complaints? Please list the top causes for complaint.
3. How were these resolved?
a. What was the course of action taken?
b. Was this effective?
4. How many complaints remain unresolved?
5. How many actions are taken to disqualify directors on an annual basis and how many of these actually result in the director being disqualified?
For further information please contact:
Nicolle Farthing / Emma Murphy
Broadgate Mainland
Tel: 020 7726 6111
nfarthing@broadgatemainland.com / emurphy@broadgatemainland.com
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