Experts Raise Concerns Over ‘Lack of Transparency’ in Pre-Pack Administration Deals

Experts have raised concerns about levels of transparency in the context of pre-pack administration processes and the use of ‘phoenix’ companies in the UK.

Pre-pack administrations allow for a company’s assets to be sold before administrators are appointed and for businesses to be legally recreated as ‘phoenix’ companies operating as distinct entities with new names. 

A degree of controversy surrounds the use of pre-pack deals when the individuals who create phoenix companies are former directors or parties with connections to the businesses that were entered into administration. 

Research from the accountancy firm Moore Stephens suggests that a decreasing number of companies which are involved in pre-pack administrations and phoenix company scenarios are submitting their rescue deals for independent oversight.

An independent review body called the Pre-Pack Pool was set up to provide that oversight but reportedly only saw 23 company sales referred to its offices over the course of 2017, compared to 49 during 2016.

The fact that the number of referrals made to the Pre-Pack Pool declined last year is being regarded as worrying in some quarters in part because the total number of corporate insolvencies in the UK during that period increased by 4 per cent.

The idea underpinning the creation of the Pre-Pack Pool was that it would help to provide confidence in the UK’s insolvency systems.

In recent years, roughly half of all pre-pack administrations have involved purchases made by individuals with prior connections to the companies being entered into administration, according to the Pre-Pack Pool.

Moore Stephens has suggested that the fall in the number of pre-pack deals being referred for independent oversight represents a worrying trend.

“The fact that the Pre-Pack Pool is still being woefully underutilised can only be bad news for wider confidence in the pre-pack process and the creation of phoenix companies,” Brendan Clarkson from Moore Stephens is quoted as saying by the Independent.

“Pre-packs and the resultant phoenix companies can offer a viable way forward for a business, but all too often they are seen as being a way of gaming the system and ridding a failing business of its liabilities.

“If the same management are going to get a second chance at running a failed business, then it seems reasonable that the Pre-Pack Pool is given oversight of the process.”