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Pack in pre-pack insolvencies, say business insurers

Small creditors and insurers are feeling the financial hurt of pre-pack administrations, according to the Association of British Insurers.

Pre-pack administrations are deals worked out before an administrator is appointed to a failing business that allows the business to be sold quickly – often to the same management team - wiping out debts and barring action from creditors to claim money.

The ABI has written to the Insolvency Service, which regulates the sector, calling for larger companies to company voluntary arrangements instead of pre-packs to avoid going broke. Current rules only let small businesses enter in to CVA agreements, that allow management to negotiate paying off debts with creditors.

Recent CVA agreements covered restructuring Focus DIY and JJB Sports. Companies that have used pre-packs include Cobra Beer and Allied Carpets.

The argument against pre-packs is they happen so quickly, creditors are left high and dry –and the ABI is stepping in because member insurance companies are paying out to cover the creditor’s losses.

Critics also claim pre-packs allow the managers to ‘cherry pick’ the best parts of their businesses and leave the rest to go under.

ABI director of general insurance and health Nick Starling said: “The ABI supports effective measures to ensure viable businesses remain afloat, and CVAs are a good way of achieving this for many struggling companies. We support a moratorium against creditor action, giving businesses vital breathing space while they develop a rescue plan for their creditors, and the extension of CVAs to medium and large companies. These measures should reduce the number of companies that are attracted to pre-pack administrations in the future. 

“Allowing companies to abuse the pre-pack system has damaged the reputation of the insolvency industry. It is essential that any new regime for CVAs is appropriately supervised and the process is both transparent and fair to all creditors.” 

“Our main concern with pre-pack administrations is that often suppliers are trading blindly with a company that knows it’s about to enter into a pre-pack right up until when the deal is done. Suppliers with trade credit insurance will be covered for their losses, but the lack of transparency leaves insurers facing an unlevel playing field and uninsured suppliers out in the cold.” 

Meanwhile, The Court of Appeal has overturned a ruling made by an Employment Tribunal last year that may have led to the increase in the number of pre-pack administration sales.

The court judged Transfer of Undertakings (Protection of Employment) Regulations (TUPE) - the passing of employee liability from one company to another – was applicable in pre-packs.

An earlier ruling in the case Oakland v Wellswood in November found that TUPE did not apply to a pre-pack sale.


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