The insolvency profession defends pre-packs by saying that small businesses trade on their reputation, so a quick administration sale is essential to preserve contracts and jobs. They also point out that the in-house management may be the only people making an offer. However, there have been cases where insolvency practitioners have helped sell a business back to its original owners free of debt, without considering marketing the business, or where they have proactively targeted failing businesses to offer the owners an easy way out of debt.

Of course, not all pre-packs involve malpractice. Some involve a new management team coming in, with fresh capital and a clear plan of action for the business geared to turning it around.

Even where the existing management team buys the business, it may be that they have been trading responsibly previously, but have been hit by loss of contracts or bad debts. Unfortunately, however, malpractice does occur.

Taking it to Whitehall
The BPIF has lobbied the Business and Enterprise Select Committee and the Insolvency Service arguing for reforms of insolvency legislation to address the issue of pre-packs. We believe that the requirements in the voluntary SIP 16 guidelines that insolvency practitioners are supposed to follow when handling pre-packs should be tightened and passed into legislation, with statutory penalties for non-compliance. This would greatly assist in improving public confidence in the pre-pack administration process.

Specifically, we would like to see a new requirement that any person advising on a pre-pack should be precluded from becoming the administrator for the company concerned, a provision for automatic scrutiny of the directors' and administrators' actions by an independent body and a mandatory requirement for court or creditor sanction for any deals involving connected parties.

We have publicly encouraged suppliers to refuse credit facilities to pre-packs until the new owners have at least demonstrated some willingness to pay off past debts. Some were quick to respond by publicly supporting our call, others have followed in practice by restricting credit facilities to pre-packs.

We are continuing to press suppliers to take a tough line on this and will also be meeting representatives from the National Association of Paper Merchants to discuss this.

One supplier that has taken a firm line is paper merchant Elliott Baxter. Managing director Tim Elliott has made it clear that the company will not supply a phoenix for credit or cash under any circumstances and that they will not support a pre-pack unless the new owner is completely unrelated to the failed business, brings a substantially new management team in to run the business and invests significant funds into the new business.

We are also tightening up our rules on admission of prepacks into BPIF membership. At its March meeting, the BPIF's National Council agreed that in the event that any company goes into administration, their membership should automatically cease, with any representatives of those companies automatically precluded from holding any office in the BPIF from the date of administration. They also agreed that a moratorium on the admission into membership should apply in respect of any company formed as a result of a pre-pack administration for a period of two years from the date it commences trading.

This proposed change to the Constitution would not apply to any pre-packs already in membership of the BPIF or to any pre-packs purchased by companies already in membership.

Andy Brown is director of corporate affairs at the BPIF