New guidance from the Pension Protection Fund (PPF) regarding pre-packaged administrations (pre-packs) outlines their approach to pre-packs when the same insolvency practitioner (IP) proposes to continue as office holder in any subsequent liquidation or company voluntary arrangement (CVA).

The PPF has long highlighted the risk that a pre-pack can often be used to avoid a company’s pension liabilities, especially prevalent where the new company (often referred to as a ‘phoenix’ company) is controlled by, or has strong links to, the owners or management of the old company that built up the original pension liabilities.

Under the new guidance, the PPF has outlined its intention to examine the extent to which a company’s unsecured creditors (for example pension scheme trustees) have been consulted before a pre-pack is concluded. Where no consultation has taken place, or where concerns have been ignored or not been taken into account, the PPF propose to appoint a new IP to supervise the CVA or liquidate the company.

Why the need for guidance?

There have long been concerns over the use of pre-packs, which are normally agreed before the appointment of an administrator. Unsecured creditors are very often unaware a pre-pack deal has been agreed, leaving very little time and opportunity for them to identify risks, protect their interests or raise concerns before a sale is concluded.

For the PPF, their concerns centre around the fact pension scheme trustees are classed as unsecured creditors, creating uncertainty for the ongoing funding of a company-sponsored defined benefit pension scheme.  When a pre-pack is agreed with little or no consultation with the pension scheme trustees, the pension scheme deficit liability can land with the PPF, leaving the new ‘phoenix’ company to operate without the previous burden of an onerous pension scheme to fund.

What next?

The PPF has signalled its intention to closely scrutinise the use of pre-packs where a pension scheme deficit exists. Other unsecured creditors have voiced similar disquiet, such as the British Property Federation representing the landlord community. The apparent lack of transparency and other concerns about the use of pre-packs led to a government review in 2014 conducted by Teresa Graham. The government has acknowledged the problems presented by pre-packs and the lack of consultation with unsecured creditors by the proposed implementation of the recommendations contained in “The Graham Report” for a system of self-regulation by the insolvency industry, combined with proposed revisions to the Statement of Industry Practice 16 (SIP 16). The self-regulation measures include, in the case of proposed pre-pack sales to connected parties, establishing a “pre-pack pool”, comprising a group of independent experienced business people whom connected buyers can approach before a sale is concluded. The pool member would consider the plans and issue a statement on the reasonableness of the proposed sale before it takes place. However, consulting the pre-pack pool is not mandatory. The pre-pack pool and revised SIP 16 are likely to be up and running by the Autumn.

The measures are voluntary, but the government has introduced a clause in the Small Business Act 2015 that allows it to ban pre-pack sales to connected parties if the measures are not adopted by the insolvency profession. The legislation has not been enacted and comes with a sunset clause, whereby the clause will disappear if it is not enacted within five years.

Self-regulation may improve the situation; however IPs will need to tread even more carefully when resorting to a pre-pack solution where there is a pension scheme deficit, as this is likely to come under closer scrutiny from the PPF in future. The measures are voluntary, but the government has introduced a clause in the Small Business Act 2015 that allows it to ban pre-pack sales to connected parties if the measures are not adopted. The legislation has not been enacted and comes with a sunset clause, whereby the clause will disappear if it is not enacted within five years.