Parliamentary failure: unjust insolvency laws continue to benefit liquidators and banks at the expense of ‘the little people’

The receiver or liquidator, usually an accountant, sells the failing company’s assets and the proceeds have to be distributed in this order:

  • the costs of the insolvency process (see one liquidator who charges £750 an hour)
  • banks which have made secured loans
  • preferential creditors, such as employees
  • unsecured creditors, such as trade suppliers
  • shareholders.

rrr3 logoIn Pre-pack administration: Saviour or stitch up? (2011), Accounting Web says that pre-packaged insolvency (“pre-packs”) which have been widely used since the financial crisis started in 2008, involve selling all or part of a company’s business or assets before the appointment of an administrator. Supporters say that they enable a quick rescue – saving jobs and helping to boost economic growth. More information here.

Critics claim that pre-packs enable incompetent and greedy directors to resurrect their business through a buy-back; “stitching up” unsecured creditors who lose out.

abi logoThe Association of British Insurers has supported reform of the UK’s insolvency system, calling for a regime that is as fair as possible to all parties. ABI’s Nick Starling acknowledged that pre-pack administrations can sometimes be the only way to enable a business to survive. However, too often unsecured creditors are badly affected, and a company is rescued and jobs saved at their direct expense. He adds:

“Overnight, small businesses that have been trading in good faith find it an uphill struggle to get bills paid or to retain title to goods they have supplied”.

Examples of pre-pack deals include bed retailer Dreams, JJB Sports & the Gatecrasher Group:

gatecrasher nightclubIn August 2013 it was reported that the Birmingham’s Broad Street Gatecrasher nightclub business (and three others in the Gatecrasher Group) entered into a pre-pack process after being unable to pay its debts. The business and assets of the old company were sold to current or former directors, who continued operating with the same contracts and clients. A later report noted that as well as the large sums owed by the Gatecrasher Group to Barclays and HMRC, 230 creditors, from suppliers and councils to individuals such as DJs are owed over £2 million and won’t get a penny back.

Administrators Duff and Phelps reveal that these creditors have lost a total of £2,081,840

A review by Dr Peter Walton of Nottingham Trent University said that the pre-pack administrator, by agreeing to the pre-pack in consultation with the company’s management team (and usually its secured creditors), favours the interests of the managers and secured creditors ahead of those of the unsecured creditors:

“The speed and secrecy of the transaction often lead to a deal being executed about which the unsecured creditors know nothing, and which offers them little or no return. There is often a suspicion that the consideration paid for the business may not have been maximised due to the absence of open marketing”.

Jon Griffin: “It’s hard to escape the conclusion that pre-pack administrations are, far too often, a cynical ploy enabling unscrupulous bosses to dodge their obligations and walk away from mountains of debt, while the little people are simply left out in the cold counting their losses”.


Posted on May 2, 2014, in Banking and finance, Conflict of interest, Democracy undermined, Government, Parliamentary failure, Planning, Reward for failure, Vested interests and tagged , , , , , , . Bookmark the permalink. Leave a comment.

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