"Phoenix" deals not protecting creditors, says debt specialist
The current insolvency regime is not doing enough to protect creditors, according to a Liverpool-based debt recovery firm.
Daniels Silverman has completed a survey of more than 350 SMES and found that that 96% of them believe that insolvent companies should not be able to escape debts by transferring assets to a new company via a “pre-pack” administration process.
Some 80% of the firms it surveyed said that they had been forced to write off debt as a result of company failures. Some 23% of businesses had been forced to write off over £25,000, 20% between £10,000-£25,000 and 57% less than £10,000.
Carole Hughes, managing director of Daniels Silverman, said: “Our survey results indicate that many SMEs would like a rethink in insolvency law to protect companies from unscrupulous directors that take advantage of pre-pack administration.
“They have told us they are becoming more and more frustrated by directors avoiding their debts by going through a pre-pack administration to form a new company from the remains of a failed company.
“It is very hard for a creditor to see an insolvent company trading ‘as usual’ often from the same premises, under the same director and with the same offering, while they are left significantly out of pocket because the money owing to them has been written off.”
She said that while there were many legitimate reasons for pre-pack deals, she felt that a change in the law was needed to prevent directors whose businesses repeatedly fail from abusing the laws.
Gary Lee, a partner at Manchester-based insolvency firm Begbies Traynor, said: “We have seen a huge increase in the number of pre-pack administrations; however, the resurrection of a business in a new corporate shell is not always necessarily in the best interests of creditors and the general economy.
“Insolvency practitioners should explore all options available before concluding that a sale back to the existing directors represents the best outcome and it should be the result of a process of elimination of all other possible options rather than the default option of choice.”
