4 in 5 suppliers face pre-pack insolvency debt

New insolvency rules do not go far enough
Only 20% have credit insurance to cover debt

LONDON. – Four in five UK suppliers may have to write off unpaid debt due to ineffectual new rules for pre-pack insolvency arrangements – where a buyer is lined up before an insolvency technically occurs and without creditor agreement. Aon, the UK’s largest credit insurance broker, is calling for change in government legislation to give unpaid suppliers the opportunity to seek recourse before the pre-pack deal is done.

Currently, there is no legal obligation for administrators of pre-packs to involve suppliers to the failed business in creditors meetings – despite representing a significant percentage of the failed business’ liabilities. January’s new Statement of Insolvency Practice 16 (“SIP 16”) rules seek to promote transparency by requiring administrators to divulge full details of the pre-pack to all creditors, but this is unlikely to happen before the insolvency has taken place.

With the Insolvency Service forecasting at least 100 pre-pack administrations every month, Aon is calling for a review of the controversial insolvency legislation to give creditors a greater say. This includes:

* advising the Insolvency Service of areas of concern with the pre-pack process on an ongoing basis;
* focusing the campaign on specific sectors;
* working with its partners, including the credit insurers and insolvency practitioners, to establish a uniform stance on pre-packs.

The estimated 20% of UK companies with credit insurance, which pays out in the event of bad debt from an insolvency, will be able to claim and recoup their losses from pre-pack arrangements. Going forward, credit insurers will scrutinise pre-pack arrangements closely and could be reluctant to cover businesses that have the same management as the old company.

James Bowker, director at Aon Trade Credit, commented: “The new insolvency rules don’t go far enough and legislation must be reviewed to support the UK supplier. Often the first knowledge the supplier has of the pre-pack is when the new owners contact them to discuss new supply arrangements – the ultimate indignity being that there is no recourse to the new company in respect of debt attaching to the old company.”