To ask Her Majesty’s Government what assessment they have made of the impact of using pre-packaged administrations (pre-packs) in undisclosed insolvency proceedings on small- and medium-sized enterprises which are suppliers to businesses restructured in this way; and whether they have any proposals for greater transparency or minimum disclosure.

My Lords, in the right circumstances pre-packaged administration can deliver benefits by saving troubled businesses, thus preserving value that would otherwise be lost. It can potentially be more effective at saving jobs than other types of administration. However, it is important that the system is monitored and not subject to abuse. On 1 January 2009, we introduced mandatory requirements for administrators to report to creditors on all aspects of a pre-pack as soon as possible. These arrangements are being actively policed by the Insolvency Service, which is examining every pre-pack report it receives, and will publish a report before the Summer Recess.

My Lords, I thank the Minister for that Answer. Is she aware of the phoenix issue being the big problem for businesses? For example, when a restaurant in London closed on a Friday and re-opened on a Monday with exactly the same staff and management, in that process of administration by pre-pack, all small creditors lost all claim. Is she aware that that is aggravated by the lack of credit insurance? Small businesses are having great trouble getting credit insurance now.

My Lords, about six out of 10 pre-packs, as the noble Baroness says, are phoenix, meaning going back to the original owners. However, one has to remember that the plight of small creditors, which I feel acutely as Small Business Minister, is actually the result of the insolvency, not of the pre-pack, and there is no evidence to suggest that small creditors fare worse in a pre-pack than in any other type of administration. Of course, there is evidence to suggest that more jobs are saved: 90 per cent of jobs are saved under pre-pack and about 60 per cent under other administrations.

My Lords, my noble friend, as ever, makes a good point, but is she aware that there is also a perception of serious abuse on occasions by directors of companies using the pre-pack arrangement to buy the company back at an undervaluation? The Government have powers under SIP 16, as she will be aware. How do they intend to use those powers to enforce against the kind of abuse that does indeed happen?

My Lords, SIP 16 does indeed provide us with powers that require and enforce transparency, which is the key to this issue. If the Insolvency Service finds abuse, both the insolvency practitioner and the directors are investigated. There were 105 cases last year of action taken against insolvency practitioners and directors themselves. Noble Lords will be aware that every working day five company directors are struck off and one is criminally convicted. We police this very actively. The purpose of SIP 16 was transparency.

My Lords, does the Minister not accept that there is significant concern about this issue? The Government cannot say simply that this is a matter for the Insolvency Service. There is significant evidence that creditors are being damaged, as the noble Baroness, Lady Gardner of Parkes, has indicated. There is also significant evidence, as the noble Lord, Lord Barnett, has indicated, that often the directors who caused the problem in the first place are simply buying back the business. Should not the Government be doing something about this rather than passing it on to the Insolvency Service?

My Lords, the Insolvency Service is part of the Government, so there is no question of passing this on. However, while this is an emotive issue, it is very important to consider the facts. The insolvency practitioners are required to ensure value for creditors, to protect employees and, since the Enterprise Act, to see whether companies can remain as going concerns. They have to look at the best way of doing this, and if the only available buyer is the existing owner, it would simply be cutting off your nose to spite your face to say, “We are not prepared to do this. Instead, we will put it into some other form of administration”. The requirement is for people to ensure that the best value is created for creditors and that the company is protected as best it can be. That is what we investigate. It is not just a matter for the Insolvency Service; it is a matter of policy.

My Lords, did the Minister see the article, which I thought was very interesting, headed, “Pre-packs: Smug v Mugs”? It claimed that pre-packs were driven by the banks, which were determined to recover their secured loans and which had,

“a hit squad to push for administration. The outcome is always identical—bank gets back its cash and unsecured creditors can go hang”.

That is my concern.

My Lords, it is a fundamental fact of capitalism and doing business that the ranking in a company is: secured creditors, preferential creditors such as employees, creditors secured against a floating charge, and unsecured trade creditors. It is not practical or sensible to change that. It is a fact of the insolvency rather than the administration. Insolvency means by definition that there are not enough assets or there is not enough cash flow to cover the liabilities. That is what results, unfortunately, for small unsecured creditors. It is not because of the nature of the administration.

I did indeed read the article to which the noble Baroness refers and, while I understand that it is an emotive issue, we have, at least in this House, the ability to understand the underlying fundamental facts of what is happening.

My Lords, when the legislation went through Parliament about seven years ago, I do not recall the Government addressing the issue of a party who went into liquidation buying back the assets at a lower price. That is the core problem to which my noble friend Lady Gardner of Parkes has addressed her mind. Will the Government undertake to look at that legislation again in the light of the increasing amount of evidence that there is a real chance that there is inappropriate behaviour?

My Lords, we will look, and indeed are looking, at the evidence from the administration’s pre-packs, in particular, and the returns that we are going to receive. We will see if there is evidence of any abuse or misuse both by company directors and insolvency practitioners. That is the place at which to root out any abuse that occurs. However, we must not forget the benefit of pre-packs: more jobs and companies are saved and there is a better economic outcome than by other sorts of administration in certain circumstances. It would be extremely unfortunate to lose that benefit because we are not able to understand the underlying facts.