Accountants advising on controversial bankruptcy deals that can leave creditors with nothing are flouting professional rules, according to a government report.

The report, by the Government’s Insolvency Service and published yesterday, showed that accountants had breached their professional code of conduct on 35 per cent of pre-packaged administrations filed in court over the past six months.

Critics of pre-pack deals — which allow advisers to put a company into administration quickly, wipe out its debts and then sell it on immediately — including MPs on the Commons Business and Enterprise Committee, say that the deals are bad for creditors.

The committee particularly opposes “phoenix” insolvencies, in which the former owners of bankrupt companies buy them back for a nominal fee.

Proponents of the pre-pack system, including Britain’s biggest accountancy firms, argue that it saves companies and jobs that would be lost if ailing businesses had to go through a formal insolvency process.

In January, the Insolvency Service introduced a new rule, known as SIP 16, to regulate the use of pre-packs. Under the SIP 16 rules, insolvency advisers must provide a host of details to justify to creditors their decision to use a pre-pack. These include the disclosure of any links between directors of the insolvent company and its buyer and an assurance that advisers have exhausted alternative avenues of selling the company solvently or re-financing it.

The Insolvency Service said yesterday that advisers in only 370 of 572 pre-packaged administrations filed during the first six months of this year had complied with the requirements of SIP 16, leaving 35 per cent of cases in breach of the rules. Disclosure in a further 17 of 572 cases (3 per cent) was so poor that 29 advisers involved in those cases were reported to their regulatory bodies.

Although the Insolvency Service said that pre-packs did not result in a higher form of misconduct than other insolvency mechanisms, the government body said that it was considering strengthening the SIP 16 regime to ensure that advisers must formally provide the Business Secretary with details of all pre-packs within a set timeframe.

The Insolvency Service said that it might also toughen the regime to ensure that the financial interests of directors of both the bankrupt company and the business that buys it are fully disclosed. Despite the significant levels of compliance, the government body said that SIP 16 would provide creditors with proper transparency if “properly applied”.

Mike Jervis, a business recovery partner in PricewaterhouseCoopers (PwC), said that SIP 16 would work once it was used widely and correctly. “If people are demonstrably and continually refusing to comply with it, the regulatory bodies who license insolvency practitioners will target them and take their licences away — that’s the ultimate sanction,” he said.

However, MPs on the Business and Enterprise Committee said in May that pre-packs were damaging confidence in Britain’s insolvency regime. The MPs found that unsecured creditors such as customers, suppliers and shareholders recovered an average of only 1 per cent of their debts during a pre-pack administration, compared with 3 per cent in a private business sale.

As the economic climate in Britain worsens, pre-packs are likely to be increasingly controversial. An analysis by PwC of the last quarter’s official insolvency figures showed that 4,966 companies entered into insolvency in the past three months, a 44 per cent increase on the same quarter last year.

The number of directors banned by the Insolvency Service for improperly creating “phoenix” companies rose by 67 per cent last year over the previous 12 months.

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