The Business and Enterprise Committee report into the Insolvency Service, published yesterday, stated that the interests of unsecured creditors must take a "higher-priority" in 'phoenix' pre-pack administrations.

According to the report, the biggest losers in pre-pack deals are generally the unsecured creditors, with only 1% of the average debt recovered, compared to 3% as part of a standard business sale.

The report said: "Unsecured creditors tend to be kept in the dark and recover even less than they would in a normal administration. This causes particular outrage where the existing management buys back the business and continues to trade clear of the original debts ('phoenix' pre-packs).

"Pre-packs of this kind fuel understandable concerns about illegitimate, self-serving alliances between directors and insolvency practitioners. The interests of unsecured trade creditors must take a higher priority, especially in 'phoenix' pre-pack administrations."

In addition to stressing the potential damage to unsecured creditors in 'phoenix' pre-pack sales, the report questioned whether such deals allowed a fair playing field for rival companies.

"There are suggestions that pre-pack administrations adversely affect competitors, who will continue to carry costs which the 'phoenix' has shed," it stated.

The publication of the committee's latest report, which marks the conclusion of its annual enquiry into one of the executive agencies of the Department for Business, Enterprise and Regulatory Reform, also warned that public confidence could be damaged by pre-packs.

"Public confidence in the insolvency regime will be damaged unless prompt, robust and effective action is taken to ensure that pre-pack administrations are transparent and free from abuse," it said.

However, the report did show that there were positives to pre-pack agreements, predominantly to the secured creditors.

According to Sandra Frisby of the University of Nottingham, secured creditors recover an average of 42% of debts as part of a pre-pack – compared to 28% in a business sale. High numbers of staff are reportedly transferred in these deals as well, the results indicate.

The Business and Enterprise Committee chose the Insolvency Service as the subject of its annual report because of the challenges facing businesses in the economic downturn.

It claimed that "rarely in the history of the Insolvency Service has there been a greater need for its functions to be performed with efficiency and effectiveness".