Insolvency Practitioners Association call for better approach to Pre-pack compliance

The forum was independently chaired by Mike Norris, formerly head of policy at the Insolvency Service and now head of Max Recovery, a creditor body deeply involved in the personal insolvency market.

Mike said:

"Although I have a personal interest in all types of insolvency, my professional interest is exclusively in personal insolvency and therefore I don’t have a vested interest in Pre-packs.”

Carl Faulds, managing director of Portland Business Recovery and IPA President welcomed delegates and started the debate by setting out the IPA’s view on the controversy surrounding Pre Packs.

He said:

“I don’t believe that you can sweep these concerns under the carpet and pretend everything is ok, when the reputation of the profession is taking a battering.”   

The forum was also addressed by Jon Moulton, formerly of venture capital firm Alchemy and now chairman of Better Capital, who expressed his concern about how Pre-packs appeared to be “clouded in secrecy” and the IP professionals’ apparent reluctance to fully engage with unsecured creditors.

He went on to say “Pre-packs are not all bad” but added that “the marketing of the business is the key issue for me” questioning whether in some cases there was any real marketing in order to attain fair value for the business rather than simply selling to the existing management.

Jon also raised concerns over how pensions are dealt with in the Pre-pack suggesting that this needed more work with the relevant regulators and also suggested that one aspect requiring greater scrutiny is whether the company incurred further credit in the period immediately prior to the Pre-pack happening.

Brendan Guilfoyle, currently administrator at Crystal Palace Football Club and the Chairman of the IPA’s Practice Guidance Ethics and Standards committee said that one significant factor is IPs’ apparent reluctance to trade a business in administration whilst looking for a buyer questioning ”as an IP why would you trade when there is no recognition of the risk of something going wrong, all the case law and the new Rules are stacked against you, funding is difficult, and there is no guarantee of a better outcome?”

Stuart Hopewell, on behalf of the Institute of Credit Management added:

“I would say the Forum was an excellent initiative of the IPA. The debate was open and frank and I'm sure gave the profession an insight into the frustrations felt by unsecured creditors.”

After nearly three hours of debate the conclusion was summed up by Carl Faulds:

“It is clear that there is a diversity of views of what is right and wrong in these situations, but an underlying fundamental complaint is that IPs don’t adequately explain their justification for carrying out a Pre Pack sale to the creditors.”

Under Statement of Insolvency Practice 16, IPs are required to report to creditors the reasons for selling a business through a Pre-pack.

Carl Faulds commented:

“SIP 16 contains a list of 17 points that IPs need to address in their report to creditors, however paragraph 2 of SIP16 contains an often overlooked but simple principle ‘an IP must be able to justify his decision to Pre-pack’, this is the substance of the SIP and merely answering the 17 points by box ticking is not good enough.

"IPs have to engage with all people including the directors, banks, unsecured creditors and HMRC” adding that “IPs will continue to be subject to criticism for as long as they deal with SIP 16 compliance on a tick box basis."

The IPA, following the forum, is calling for all insolvency regulators to look at the substance of SIP16 compliance and whether IPs are actually truly justifying their actions to creditors.

"We need to emphasise the obligation under SIP 16 to be able to actually justify the decision to Pre-pack a business to the satisfaction of creditors, not just provide an excuse.

"If IPs can’t or don’t justify their conduct, that is a failure to comply with SIP16 even if they have answered the 17 specific points, and disciplinary action must be taken by the regulators. Only then will creditors have confidence in the process."

Carl closed the forum saying that:

"We have to take away these discussion points and distil them into action. We have to get the profession to speak with one voice, although not necessarily through one regulator.

"Overall most IPs are carrying out a vital task and are doing it well, to the benefit of creditors, but in some cases IPs attitudes to unsecured creditors needs to change and IPs need to put more effort into communicating what they are doing and why and the regulators need to come down hard on those whose behaviour is not up to best practice”