A procedure for the acceptance of the pre-pack?
Teresa Graham in her report to The Rt Hon Vince Cable (the “Graham Review into Pre-pack Administration”) has re-opened the debate into the emotive area of pre-pack sales. A review nine months in the making has resulted in Teresa Graham concluding that the pre-pack has “a unique place in the insolvency market”. As would be anticipated, the report does not stop there, with proposals being made for change. Despite her recognition of the role played by the pre-pack Ms Graham concludes “there must be major changes in the way they are administrated”.
The pre-packaged sale of all or part of the assets of a company in administration (a “pre-pack”) are by their nature lacking in transparency, and arising from this, suffer from a lack of trust. An important tool in the restructuring of a business, enabling (if you are in favour of such a process) the preservation of trading via an alternative entity without the financial pressure placed upon the former business. A business can often subsequently trade profitably, whilst (and one of the main arguments for the pre-pack), preserving the jobs of employees which would otherwise have been lost via alternative insolvency procedures. The sale of the business is negotiated prior to administration, with documentation being agreed, the company being placed into administration and the administrator then immediately, or very shortly thereafter, completing the transaction. Most people will learn of the sale of assets at the same time they learn that the company has entered administration.
The most controversial pre-pack is that involving the sale of the business entering into administration to “connected parties”; usually to a company under the control of a director of the existing company. Commonly termed a “phoenix” such transactions are an easy target for those critical of the process: the resultant purchaser showing many of the characteristics of the existing company, but without the debts. Ms Graham acknowledges “pre-pack numbers are relatively small but the lack of transparency and trust in the process means that the ‘noise’ surrounding them is far greater than should be the case”. The answer, it would appear from the report is self-regulation. A group of experienced professionals voluntarily reviewing transactions brought to their attention before the deal goes ahead. Further the phoenix scenario would require a report demonstrating the viability of the on-going business.
It is proposed where there is a connected party that party will be required to publish a report to demonstrate the viability of the ongoing business. The proposed wording of the viability statement to be provided by the connected party will require that party to state the newly formed acquirer of the business “is a going concern and will remain a going concern for at least 12 months”.
The introduction of such a process raises the question of how many transactions will be affected, and why should we look to preserve such transactions. There were around 2,500 administrations in 2012 and circa 2300 in 2013. Of these, around 65% were cases which in one-way or another, involved connected parties. Put into perspective, around 250,000 businesses disappear from the register at Companies House each year. Around 20,000 of these go though an insolvency process, with about 600 to 700 being pre-packed. Pre-packs are not therefore, highly prevalent. Teresa Graham recognises that “there are significant cost advantages of a pre-pack”, and forms the view that greater transparency is a solution to reducing the noise and increasing acceptability of the process.
Referencing research from the University of Wolverhampton, it is concluded “in many circumstances a pre-pack administration is the best or perhaps more fairly the least worst outcome for all stakeholders in a business – including all classes of creditors…. when comparing pre-packs and trading administrations on a like for like basis, sales following pre-packs are more likely to succeed.”
Jenny Willott, the business minister has reacted favourably stating pre-packs “allow the viable part of the business to continue operating and jobs are saved. But it is important for those who are owed money to know they are getting the best possible deal in the circumstances. We will be working with business and industry to implement these recommendations in full and we believe it will help restore trust and confidence in pre-pack deals”.
The research from the University of Wolverhampton referenced in the report clearly adds weight to the benefits of the pre-pack being permitted to continue. No doubt the criticism will again raise its head but may be these proposals will reduce the noise and increase acceptability. Whether self-regulation is the answer will remain to be seen, such regulation has not been favourably received when applied to bankers and journalists (to name but two).
For further information concerning the pre-pack process and its possible use, please contact Stephen Blair or Sumaira Choudary.
t: 020 7227 7254