Pre packed company

In 2014 Teresa Graham published the results of her independent review commissioned by the Government into the perceived misuse of the administration regime where a “pre-packaged” sale of a company’s business occurs immediately on appointment of an Administrator.

Known as a “Pre-Pack” the word has moved into common parlance in the corporate world and in the press, as some high profile cases brought the procedure into the public eye.

The process is often used where time and other commercial pressures on a business mean that there is not time, or it would not beneficial to appoint an administrator and then seek a sale or rescue, as this can have an instant impact on value and saleability and may result in even the incumbent management/owners themselves having less of an interest in the business. The pre-pack enables a proposed Administrator, where the circumstances suit, to agree the terms of a sale in advance and complete a deal immediately on appointment. This gives a seamless transition as far as customer perception is concerned and of course means continuity for employees. Creditors don’t always see it that way of course and many an eyebrow has been raised when they learn the business has been subject to a pre-pack – the obvious concern is “has the Administrator done the right deal for us?”…. “was the business worth more on the open market?” etc, with the lack of transparency prior to a sale being an obvious gripe.

As the use of the process has been drawn more and more into public and press focus, so the industry has reacted.

Statement of Insolvency Practice No.16 (“SIP16”) required an Administrator to give details of the sale and the circumstances leading to it, including comment on the options explored and the efforts made to ensure the sale was in the best of interests of the company and its creditors.

But as pressure mounted, the Government commissioned an independent review into the use of the process. The Graham Report was the result and its recommendations resulted in the establishment of the Pre Pack Pool (“the Pool”), which came on line in November 2015.

The purpose of the Pool is to give an independent view on the suitability of a proposed pre-pack. The use of the Pool is not mandatory and requires an application by the purchaser, rather than the selling company or its proposed Administrator and costs (the purchaser) £800+VAT.

The result is not binding on the purchaser and would not prevent a sale. There is no obligation to pass on the results to the Administrator who along with the creditors might never know its content or conclusions.

6 months since being introduced feedback on the Pool thus far has not been positive; a prominent London solicitor has been quoted in Accountancy Age as saying that the Pool is:

“… riddled with technical difficulties, it is costly, time consuming and, frustratingly, it wastes valuable time during a complex transaction. In short, it serves no useful purpose whatsoever”.

There has been no indication how many applications to the Pool have been made but the suspicion is not many. Talking to other professionals, one has commented that he raised the option of the Pool with a purchaser on a proposed transaction who was utterly incredulous that as well as investing cash in a struggling business, taking on accrued staff costs and rights and probably having to give personal guarantees to suppliers, he was also being asked if he “wanted to” pay the Pool £800 for an opinion he didn’t need.

That particular purchaser decided not to do so and it seems many have also made that decision.

So, if the Pool does not serve a useful purpose what next?

The Graham report concluded that if its recommendations (including the Pool, revised SIP16 etc) didn’t work, then the Government had to consider legislation to control the use of pre-packs.

We are not there yet, but we don’t know how long the Pool will be given to prove itself, or how the public perception will be measured… given that the Pre Pack Pool Limited counts Teresa Graham as a shareholder, the Government is going to need to find another independent reviewer to assess its effectiveness (or otherwise) and so we are unlikely to be seeing wholesale legislative changes for at least 5 years, probably more.

There may be space for the Pool, or something like it, in the pre-pack process but it’s clearly not working in its current form and there ought to be an urgent review and overhaul of the process to make it relevant, useful, appropriate to the case and cost effective.

Danny Allen
Senior Manager

 

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