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| Annual Report 2007 Recommendations Follow up to Other Recommendations in last year’s Report Pre-Packs “Pre-pack” is the term used to describe the sale of an insolvent business by an IP appointed as the administrator on the basis of an agreement negotiated before the administrator’s appointment. Such sales are completed without the business being offered on the open market and often without consultation with all the creditors. We recommended last year that the Insolvency Service should require administrators, when reporting to the full body of creditors, to give a reasoned explanation of why they proposed a pre-pack and, in particular, why they decided against offering the business for sale on the open market. The IS has now made proposals to amend secondary legislation, which will require the administrator to explain their actions in selling companies through a pre-pack to the full body of creditors as a precondition for getting the creditors to authorise the payment of any expenses the IP has incurred prior to appointment. Whilst we welcome the duty on the administrator to explain his or her actions to creditors, we are concerned that the new rules on pre-appointment expenses may actually create a perverse incentive for IPs to ignore the potential conflicts of interest which may arise when an IP, who has previously been advising the company or its directors, decides to accept an appointment as administrator in order to execute a deal which he/she may have set up. We are pursuing this point further with the IS, the JIC and other interested parties. Reports under the Company Directors Disqualification Act 1986 We expressed concerns last year about the Government’s action in cancelling a significant proportion of the Insolvency Service’s planned investigation programme into IPs’ reports (D-reports) into company directors’ conduct in the case of insolvent companies. The deterrent effect of the Company Directors Disqualification Act depends on directors believing that any misconduct will be investigated and, where appropriate, penalised and on the commitment and thoroughness of the IPs, in writing their reports on the conduct of directors’ of insolvent businesses. The effectiveness of the system could easily deteriorate if the perception develops among directors and IPs that there is a significant chance that the latter’s reports will not be followed up. We have been assured by the IS during the year that the number of investigations carried out has exceeded the initial forecast. We have also recently been informed that that it has commissioned an external review into how the productivity of the Investigation Branch can be improved through changes in its working practices. We continue to believe that it is essential that all adverse D-reports that contain prima facie evidence of misconduct by directors should be properly investigated by the insolvency staff. Correspondence between IPs/RPBs and Debtors/Creditors We continue to discuss with the RPBs our recommendation that they should issue guidance to IPs proposing a target of 10 working days for replies to correspondence from creditors, debtors and the general public. |
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