For a legal insolvency process sanctioned by government, pre-packs have copped a lot of flak; although accusations that they are being marketed as a way of dumping debt tend not to be accompanied by evidence. Pre-packs have come under further scrutiny following the Business, Innovation and Skills Committee’s recent report into the Insolvency Service.

Government has already looked at overhauling pre-packs, but decided against plans to introduce a three-day notice period (when the sale was to a connected party) in January last year. Their function of providing a rapid sale would have been undermined by this proposal and left many more businesses facing liquidation and increased job losses.

In fact, the committee’s headline concern was how under-resourcing risks undermining confidence in the Insolvency Service. Nowhere is this more evident than in the impact on director disqualifications by the service. Ten years ago 45% of ‘D1 reports’ sent to the service by insolvency practitioners (IPs) led to a disqualification. This has dropped to just 21%.

The committee said: ‘The aim must be to disqualify or sanction all directors found guilty of misconduct, and the funding necessary to achieve this should be provided. Any dilution of enforcement activity sends the wrong message.’ Arguably, this is more important than pre-packs for the economy – every delinquent director successfully disqualified saves £88,000 in terms of damage they could have gone on to cause.

There were legitimate concerns about pre-packs, both over how the Insolvency Service monitors compliance, and levels of compliance by IPs. A pre-pack administration is where the sale of the business is marketed prior to the company entering administration and subsequently sold on appointment of administrators. In some cases, an IP may conclude that there is too much risk of value leakage if a business is marketed before an insolvency process and therefore enters into a rapid sale post-appointment.

That sale may be to a connected party or a willing buyer prepared to pay a price that the IP does not believe can be improved upon in the circumstances, given the urgency to sell immediately. However, the administrators must submit a Statement of Insolvency Practice (SIP) 16 report outlining why the pre-pack was chosen as the best course of action for creditors. R3 agrees with the committee’s recommendation that the Insolvency Service should include feedback to each IP and their regulatory body where SIP 16 reports have been judged non-compliant.

Until now, completing a SIP 16 report has been similar to doing an exam without knowing exactly what the questions were. IPs should be informed of criteria the service expects to be included. This would help address the committee’s other recommendations for greater transparency, higher levels of compliance and a stricter regime of sanctions. As a further measure to boost confidence, R3 also believes you could give creditors the option to appoint an independent liquidator to examine a connected party sale.

The service’s own reports on SIP 16 have not identified any evidence that there are different levels of director misconduct in a pre-pack compared with any other corporate failure. Similarly, a sale back to existing management is not in itself indicative of misconduct or malpractice. One must also remember that serious breaches in compliance are rare with SIP 16 reports. Last year, just 4% of SIP 16 reports were referred to the regulatory bodies, and less than half of these led to action.

R3 is happy with the levels of transparency offered by IPs, but we appreciate more can be done to boost confidence around the process, which the proposals outlined by the committee would help with. However, will creditors really ever get to love pre-packs? Perhaps we should be realistic, given they are an insolvency procedure and deployed in situations where essentially the money has run out.

Lee Manning is president of insolvency trade body R3