Government urged to re-think decision not to offer creditors more legal protection from ‘phoenix’ companies

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The Forum of Private Business is responding with dismay to a government announcement that legislation to improve the pre-pack insolvency sales process, designed to clamp down on ‘phoenix’ companies starting again while leaving their creditors unpaid, will now not go ahead as planned.

In a statement, the Employment Minister Edward Davey said that, having ‘taken into account all of the issues’, the Government has decided the benefits of the proposed legislative controls are outweighed by adherence to the Government’s current ‘moratorium’ on new regulations.

However, while the Forum’s latest ‘cost of compliance’ Referendum survey shows small firms’ annual red tape bill has reached £16.8 billion in total, recent late payment data suggests that the UK’s small businesses are owed more than £33 billion in outstanding invoice payments. The Forum believes the Government should think again, revisit some of its earlier proposals and go even further to protect creditors.

“Cutting red tape is hugely important but, against the backdrop of the Government’s de-regulatory agenda this is one area where tighter legislation would protect more firms from ‘phoenix’ companies abusing the pre-pack insolvency process by starting again while failing to pay them,” said the Forum’s Senior Policy Adviser Alex Jackman.

“Late payment – or in this case non-payment – devastates firms’ ability to maintain any kind of healthy cash flow and threatens their very survival. The Government is working on some extremely positive projects at present to help firms minimise the problem and offering them more protection in this way would also be of great benefit.”

In May 2011 the Forum wrote to Mr Davey as part of a consultation on ‘improving the transparency of, and confidence in, pre-packaged sales in administrations’, which followed the Statement of Insolvency Practice (SIP16) guidelines put in place in January 2009.

Reporting its members’ concerns over the abuse of the pre-pack insolvency process, for example when an existing management team or associates are able to effectively buy back the company without consultation with creditors, often doing this deliberately with the express purpose of avoiding paying debt, the Forum welcomed several proposals but called for more robust action to tackle the problem.

The Forum prioritised three options: first, following a pre-pack administration, restricting exit to compulsory liquidation so as to achieve automatic scrutiny of the directors’ and administrators’ actions by the Official Receiver; second requiring different insolvency practitioners to undertake pre- and post-administration appointment work; and third requiring the approval of the court or creditors, or both, for all pre-pack business sales to connected parties.

However, while backing several steps – such as providing a three-day notice period of an insolvency sale and ensuring best value sale prices to benefit creditors – the business support organisation made a number of further proposals to tackle the non-payment problem. They were:

  • Strengthening the Statement of Insolvency Practice (SIP16), with penalties for non-compliance
  • Tightening the rules against directors involved in multiple pre-pack insolvencies
  • Preventing administrators actively promoting pre-packs as ‘business as usual’, following concerns that some are advising their clients to actively pursue this approach
  • More robust scrutiny from the Insolvency Service.

On this final point, Mr Davey said the Insolvency Service already monitors compliance by insolvency practitioners with the SIP16, which requires administrators to provide creditors with early post-sale information on details of the sale and the justification for it.

He said officials have been asked to undertake an ‘urgent review’ in conjunction with stakeholders of how the existing controls on pre-packs have been working and whether, in light of their experiences and the outcomes from the monitoring, more could be done within the existing regulatory framework to improve confidence and transparency.