Memorandum submitted by the Association
of British Insurers
The ABI is the voice of the insurance and investment
industry. Its members constitute over 90% of the insurance market
in the UK and 20% across the EU. They control assets equivalent
to a quarter of the UK's capital. They are the risk managers of
the UK's economy and society. Through the ABI their voice is heard
in Government and in public debate on insurance, savings, and
investment matters.
SUMMARY
— Pre-packaged administrations ("pre-packs")
are deals for the sale of an insolvent company's assets that are
put in place before the company goes into a formal insolvency
process.
— This process is normally negotiated
behind closed doors and often before the administration order
is made. Unsecured creditors and trade credit insurers remain
unaware that the process is happening. This lack of transparency
and notification can cause the collapse of the unsecured creditors
(including SMEs).
— This is becoming an increasingly
serious problem. The Government must act to address these problems
by, for example, imposing transparency and minimum disclosure
requirements before the pre-pack takes place.
THE CONSEQUENCES
OF PRE-PACKS
FOR SMES
AND TRADE
CREDIT INSURERS
1. Pre-packs are negotiated behind closed
doors and often before the administration order is made, which
means that unsecured creditors and trade credit insurers are kept
in the dark.
2. Unsecured creditors often experience
that the money they have outstanding is never repaid as all the
debtor's assets have been stripped away before the creditor is
even made aware that a pre-pack has taken place. This is to the
detriment of small and medium-sized enterprises (SMEs), and also
of credit insurers, who are faced with claims from SMEs resulting
from the unpaid debts. Only around 20% of SMEs have trade credit
insurance, so those who do not are left to cover the losses on
their own.
3. There has been an increase in the number
of pre-packs. The ABI estimates that 50% of administrations are
now pre-packs. With the increase in businesses going into administration
due to the economic downturn, the lack of transparency and notification
to unsecured creditors in pre-packs is becoming an increasingly
serious problem both for SMEs and for insurers.
4. Pre-packs can keep a business going and
avoid redundancies. However, the lack of transparency and lack
of notification can cause the collapse of the unsecured creditors.
The recent Statement of Insolvency Practice 16 by the Accredited
Licensed Insolvency Practitioners is a step in the right direction,
but only deals with the situation after the pre-pack. The Government
should act to address these problems by, for example, imposing
minimum disclosure and transparency requirements.
January 2009
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