MPs have called for tighter regulations and more scrutiny of pre-pack administrations.
A report by the Business and Enterprise Committee into the actions of the Insolvency Service found that public confidence in insolvencies would be damaged “unless prompt, robust and effective action” is taken to ensure pre-packs are “transparent and free from abuse”.
The MPs highlighted “Phoenix” pre-packs in particular - where existing management buys back the business, following private negotiations with an insolvency practitioner. The management of MFI bought back its business from administrators last year, then collapsed months later, leaving creditors out of pocket.
The report found that these kind of administrations fuel “understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners”. It said the Insolvency Service is at risk of “real reputational damage” if the situation is not addressed.
The Committee found unsecured creditors fare worse during a pre-pack, recovering 1 per cent of their debts on average, compared to 3 per cent as part of a standard business sale.
In January, the Government imposed a more transparent regime for phoenix deals, but the Committee warned if it does not prove effective, it will be necessary to “take more radical action, possibly by giving stronger powers to creditors or the court”.
The Insolvency Service is an executive agency of BERR, primarily funded by fees for its services. It is designed to administer and investigate the affairs of bankrupts, of companies and partnerships wound up by the court, and establish why they became insolvent.