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Govt promises to reduce insolvency loophole

Published on 22 Mar 2010 under category: legal

Companies may have to disclose information about the pre-pack process of their administration, following criticisms that the legal loophole is unfair to creditors.

The pre-pack system allows owners to sell the solvent part of their business quickly, so they continue paying staff and trading.

However, the system can be taken advantage of by directors who use it to pay off their own debts, rather than those owed to their creditors.

The Insolvency Service moved last year to introduce new reporting guidelines that would help creditors to know how much money was being retained by the debtors – but they have claimed since that a third of business were failing to supply adequate information.

Under the new guidance, creditors will be able to sanction pre-pack deals for those involved, so they are party to the process.

In addition, the Insolvency Service plans to punish misconduct with harsher penalties: "Directors of insolvent companies, which includes those going through administration, can be disqualified by the court for a period of between two to 15 years if their conduct in the period leading to the insolvency proceedings is considered to be unfit."

If you require advice on Insolvency and Bankruptcy please call us on +44 (0)20 7831 0101 and ask for Katherine Sillett.