Four out of five UK suppliers may have to write off unpaid debt due to “ineffectual” new rules governing so-called “revolving-door” administrations, according to the country’s largest credit insurance broker.
Aon is calling for change in legislation to give unpaid suppliers of collapsed companies the opportunity to seek recourse before a pre-pack deal - sometimes known as a “revolving door” administration - is drawn up. The pre-pack process - which lines a buyer up before an insolvency technically occurs - has been surrounded by controversy as they have been accused of leaving creditors out of pocket.
In a pre-pack deal, a collapsed company can be sold on without its liabilities, leaving creditors such as HM Revenue and Customs, suppliers and landlords stranded with unpaid invoices on their hands.
They have also come under fire as a way for the management which oversaw the downfall of the company to buy back the collapsed business minus the debts attached - often in a rapidly-executed deal behind closed doors.
Pre-packs have become increasingly popular as the downturn bites - the Insolvency Service recently forecast at least 100 pre-pack administrations every month - and firms such as USC, Whittards of Chelsea and The Officers Club have opted for the process in the last few weeks.
Currently there is no legal obligation for administrators of pre-packs to involve suppliers of the failed business in creditors meetings.
But January 1 saw the introduction of new rules, called Statement of Insolvency Practice 16 (“SIP 16”) rules, which aimed to increase transparency by requiring administrators to release full details of the pre-pack to all creditors.
Under the new rules administrators should provide creditors with the reason a pre-pack deal was chosen and any links the new owners had with the previous management team as well as the price paid. But Aon said this was unlikely to happen before the insolvency has taken place and is calling for a review of the controversial insolvency legislation to give creditors a greater say.
Aon Trade Credit director James Bowker said: “The new insolvency rules don’t go far enough and legislation must be reviewed to support the UK supplier. 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.”
But many insolvency practitioners believe pre-packs offer the only hope of stability for a collapsed company and the best way to preserve jobs.
James Martin, Midlands chair of insolvency trade body R3 and partner at the Birmingham office of Begbies Traynor, defended pre-packs, saying suppliers’ losses were not due to the administration process but are down to the fact a company had failed.
He said: “A loss is caused by the failure of their customer, against which they will of course seek to defend themselves, but for the moment this is on the increase. The pre-pack is an increasingly useful way of trying to preserve businesses.”
“Independent research has shown that pre-packs perform better than business sales in preserving employment – in 90 per cent of such cases, 100 per cent of jobs are saved.”
A committee of MPs is set to consider plans to reform administration processes with Peter Luff, Tory chairman of the Department for Business, Enterprise & Regulatory Reform committee planning to use an inquiry into the operations of the Insolvency Service as an opportunity to examine the practice of pre-packs.
Insolvency Service chief executive Stephen Speed is due to be questioned about potential abuses of the system and his proposals for changes when he appears before MPs on January 27. The number of company collapses in England and Wales has snowballed in the past year, with 1,006 companies in administration in the third quarter of 2008.