Government reviews insolvency rules that let firms dump schemes

By: Jack Jones

The government has launched a review of pre-pack insolvencies, the controversial practices that can enable companies to dump pension liabilities.

The Department for Business, Innovation and Skills said the review, announced during a parliamentary debate, would begin in “late spring” although a timescale had yet to be set.

Pre-packs involve arranging the sale of a business before an insolvency is triggered, with the transaction going through as soon as an administrator is formally appointed.

As with any type of insolvency, unsecured creditors such as defined benefit pension schemes tend to lose out from the process.

The Pensions Regulator has criticised the practice in the past (PP Online, 21 October 2011) and investigated pre-pack arrangements involving Silentnight (19 May 2011) and Brintons (29 September 2011).

BIS said approximately 85% of the business sold though pre-pack were so called ‘phoenix companies’, acquired by former managers or owners.

The practice, which accounts for about a quarter of all insolvencies, is not specifically provided for in insolvency legislation but has arisen out of practice and through judicial approval.

BIS stressed that pre-packs could deliver substantial benefits by saving troubled businesses that would otherwise be lost.

The department said the speed of the pre-pack process can be essential to preserving value and saving jobs in difficult financial circumstances.

The Insolvency Service, which regulates the industry, said measures were already in place to increase transparency and prevent abuse.

A spokesman for the organisation said: “Strengthened measures are being introduced to improve the quality of information insolvency practitioners are required to provide on pre-pack deals and we are using targeted monitoring of outcomes to assess whether there is evidence of abuse.

“Used appropriately, pre-packs can be a highly effective process to ensure the best deal for creditors by better enabling the rescue of businesses, preserving value and safeguarding jobs.”

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