Call for "pre-pack" reform as suppliers are left high and dry

LEADING businesses have called for changes to insolvency law to regulate the increasing use of so-called “pre-pack” deals. 

A rise in the number of “pre-pack” administration deals, as seen recently with North West DIY chain Fads and tea and coffee retailer Whittards, is expected to continue as economic conditions deteriorate.

Credit insurer Aon and accounting giant KPMG have said reform is necessary for a number of reasons.

According to Aon, four in five UK suppliers may have to write off unpaid debt due to what it claims are “ineffectual new rules” for pre-pack insolvencies.

A pre-pack deal  is where a buyer is lined up before an insolvency technically occurs and without creditor agreement.

Aon, the UK’s largest credit insurance broker, is calling for change in government legislation to give unpaid suppliers the opportunity to seek recourse before the pre-pack deal is done.

Currently, there is no legal obligation for administrators of pre-packs to involve suppliers to the failed business in creditors meetings – despite representing a significant percentage of the failed business’ liabilities.

With the Insolvency Service forecasting at least 100 pre-pack administrations every month, Aon is calling for a review of insolvency legislation to give creditors a greater say.

James Bowker, director at Aon Trade Credit, commented: “Often the first knowledge the supplier has of the pre-pack is when the new owners contact them to discuss new supply arrangements – the ultimate indignity being that there is no recourse to the new company in respect of debt attaching to the old company.” 

Accounting giant KPMG believes that while pre-pack deals have a role, there should be some changes to insolvency law to reflect their increased use.

Brian Green, head of KPMG restructuring in the North West, commented: “It is wrong to say that ‘pre-pack’ administrations are, as a whole, a bad thing; in fact, they have an important place in the restructuring toolbox.

“Pre-packs are often used to complete a complex financial restructuring and the only stakeholders who might be compromised are the shareholders and financial creditors who are usually consulted. In these cases, customers, landlords, suppliers and employees will often not be affected at all.

“It is a sad fact that some businesses do fail and some people do lose money or their jobs. It is important, however, that we have the tools available to protect as much as possible, as efficiently as we can.

“However, we also recognise that there are circumstances where boards of directors who have built up too much debt and trade credit see the pre-pack as an easy way to create a so-called ‘phoenix’ company, leaving creditors high and dry.

“The new requirements for transparency imposed on insolvency practitioners, called SIP 16, go a long way to ensure pre-packs are not abused but we do think that more can be done.”

Mr Green believes the government should bring the pre-pack process within the auspices of insolvency law to legitimise their use.

“By bringing pre-packs and SIP 16s within the law, aggrieved creditors will have a much stronger recourse. It is better for everybody – including creditors, insolvency practitioners, employees, company directors and landlords – that pre-packs are legitimised and brought within the insolvency legislation.”

Simon Allport, a partner at Ernst & Young in Manchester believes that improving the perception and understanding  of pre-pack insolvency is more important than anything else.

He explained: “It is often the public perception that is the problem rather than the underlying reality. Where stakeholders have a commercial interest in the outcome they are usually consulted and the mechanism, if used properly, can secure the survival of a business that might otherwise fail to survive an insolvency process.

“A pre-pack administration must withstand scrutiny from all possible parties, so even a sale to a connected party shouldn’t be prohibited.”