Law firm raises issue of mis-sold pre-packs

COMPANY directors are being mis-sold pre-pack administrations by insolvency practitioners who are offering them as an easy option to escape debts and get back into business, a Manchester lawyer has claimed.

Richard Drinkwater, a corporate recovery partner at law firm Pannone, said many directors who were ‘encouraged’ into a low cost pre-pack administration could face financial ruin or even prison.

Mr Drinkwater said that in his experience some practitioners are rushing the process through, without addressing all of the legal issues faced by a company or following statutory legal procedures.
 
He said: “While many directors perhaps naively believe their company’s outstanding debts will be wiped out, the reality can be very different.
 
“Pre-packs which are not executed properly do not guarantee that the company’s debts to its bank will disappear. A bank will often only lend money to a company if the repayment of that loan is secured against the assets of that company.
 
“If those assets are sold to a new company using the pre-pack procedure without the consent of the bank, that security will remain in place and will only be removed once the new company has settled the debt owed to the bank.”

“I would urge directors not to rush into a pre-pack without taking proper legal advice or they could find themselves, and their new company, far worse off.”
 
Responding to Mr Drinkwater’s assertions, Jeremy Oddie, North West chairman of the insolvency body R3 said the organistion was aware of just a small number of cases where the pre-pack procedure was potentially mis-used.

He said: ““nsolvency practitioners are highly regulated professionals and have a legal duty to act in the creditors’ best interests. Pre-packs are an effective and legitimate business rescue tool and have been shown to preserve businesses, save jobs and increase returns to creditors.
 
“We appreciate the concerns surrounding sales to connected parties, however safeguards against abuse are built into the pre-pack process.

“Under Statement of Insolvency Practice (SIP) 16, the administrator must justify to creditors why a pre-pack was considered appropriate. The latest Government figures show that in only1.7% of cases was the insolvency practitioner referred to a recognised professional body for disciplinary procedures.”