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Pre-pack administrations to be investigated by OFT

November 24th, 2009 by Chris St Cartmail

There has been a great deal of fuss in the press about the “pre-pack” administration process not giving a fair deal for the business’s creditors and accountancy firms benefiting in the form of high levels of fees. Despite many attempts by the industry to highlight the benefits of a “pre-pack administration”, it seems that the process is going to be looked at in detail by the Office of Fair Trading.

The investigation is aiming to look at fee levels and recovery rates, following concerns about what’s returned to creditors and how much the preservation of jobs in the insolvent business has cost. If the OFT finds against the larger accountants’ fee levels then it is likely there will be more work for the next tier of accountancy firms.

It looks as if the whole insolvency industry is going to have an interesting 2010. This is because business groups, such as the Forum of Private Business, have asked the OFT to delve into “phoenix companies” as well.

For those not familiar with the processes a “phoenix company” is simply a new company that has bought the assets of an insolvent company and carries on in the same trade as insolvent company, often with the same name and most, if not all, of the directors from the failed business.
Complaints against this process focus mainly around accusations that the assets of the failed company have been transferred out at below market price.

However, a “pre-pack” is a deal for the sale of an insolvent company’s business (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner (IP) is formally appointed, and is then rapidly executed once the appointment is made.

The Office of Fair Trading’s senior director, Clive Maxwell, commented: ‘We want to identify any potential problems within the corporate insolvency market to ensure that firms and practitioners are competing freely and that the market is working well for the end consumers. Efficient insolvency services are an important component of a modern market economy.’

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