How will ‘clean-up’ proposals affect pre-pack administrations?

A recent review of pre-pack administrations, carried out by Teresa Graham CBE and commissioned by business secretary Vince Cable, has set out proposals to improve the transparency of this often controversial insolvency process.

A pre-pack is an arrangement whereby the sale of all or part of a struggling company’s business or assets is negotiated with a purchaser before the company is put in to administration, a formal insolvency process.

The sale is then completed by an administrator shortly after their appointment. This reverses the normal process, where an administrator is appointed and then begins marketing the business for sale.

What are the advantages of pre-packs?

• The costs of the administration process is normally lower and there is less risk of further losses being incurred while a buyer is found.
• Unlike in normal administrations, there is no uncertainty while a buyer is found, which in turn means key members of staff are more likely to be retained.
• More jobs are generally saved in comparison to normal administrations.
• If stock has a limited shelf life, it is more likely to be sold at full value, resulting in better returns for creditors.
• Adverse publicity and speculation about the future of the business, which could damage a business before it is sold, is likely to be reduced significantly.
• Often there is no other option, other than putting a company in to liquidation and closing the business.

What are the complaints made about pre-packs?

• A lack of transparency. Deals are negotiated before a company enters administration normally without unsecured creditors having the opportunity to vote on it, which in turn can lead to a lack confidence in the procedure. Creditors tend to be particularly suspicious where a business is sold back to its original owners or parties connected to them.
• The best price for a business or assets may in some circumstances not be realised. While marketing will normally be carried out and professional valuations will always be sought before a deal is agreed, the market is rarely tested fully due to the need to prevent details of a company’s financial difficulties being leaked. There is a view that in some cases valuations are not as thorough as they could be.
• It may be a short-term fix. A pre-pack sale of a business normally doesn’t involve it being restructured and often leaves the management team in place, so it is often debatable whether it will perform any better in the future. There are also concerns that insufficient attention is paid to the viability of purchasers.

However, the clean-up proposals aim to satisfy all parties, but creditors in particular, that any deal is fair and in their best interests. The proposals include:

Pre-pack pool

Where a purchaser is connected to the previous owners, it is proposed that they should approach a pool member to provide independent scrutiny of a proposed sale. Pool members will be experienced business persons, possibly nominated by an organisation such as the Confederation of British Industry (CBI). The idea is that the terms of a deal can be scrutinised but without news of a company’s financial difficulties being leaked. Statements from pool members will be attached to Statement of Insolvency Practice 16 (SIP 16) reports.

Viability reviews

It is proposed that where a purchaser is connected to the previous owners, they should voluntarily prepare viability reviews outlining how the purchaser will survive for at least 12 months and what they will do differently to avoid a further failure down the line. The reviews will be attached to SIP 16 reports.

Improved marketing

It is proposed that all marketing should comply with some prescribed core principles, the aim of which are to extend and improve the process of marketing businesses. Any deviation from this will be brought to the attention of creditors in the SIP 16 report.

Valuations

SIP 16 will be amended to require valuations to be carried out only by those with professional indemnity insurance, the logic being that insurers already place their own stringent checks, so creditors will be more satisfied of the thoroughness and ultimately the accuracy of valuations.

For more information on this, or any other insolvency matter, contact James Robbins on 01772 208503 or James.Robbins@harrison-drury.com. James specialises in dispute resolution as part of his role as a solicitor at Harrison Drury lawyers in Preston.