Pre pack review – so much for a rescue culture?

30th June 2014

The government has just published its latest thoughts on what to do about pre packaged business sales by Administrators. The recommendations, following a report by Theresa Graham, are voluntary although the Insolvency Service is threatening legislation if directors and insolvency practitioners don’t adopt their line of thinking in the near term.

In 2013 there were 728 prepacks, mainly of small owner-managed companies. Overall prepacks represented approximately 29% of total Administration appointments. So why all the fuss?

Not so long ago, when a company filed for Administration a lengthy Court report was needed. The Court granted an Administration Order and if anyone became unhappy with the process they could apply to Court for relief. But in later years the politicians decided the Courts were too busy and life should be made easier in an attempt to promote a ‘rescue culture’. This led to the Enterprise Act which allowed directors and shareholders to make out-of-Court appointments.

In the years between the Insolvency Act 1986 and the Enterprise Act 2002 many things have changed in the world of corporate restructuring. Small companies found that bank lending has become a thing of the past and have been forced to adopt additional methods of financing. Sales ledgers are often factored, plant and equipment leased or hired. Most small companies now have little in the way of unencumbered assets. And Administrators have found that post appointment trading has become increasingly difficult due to lack of funding, compliance issues and general aggravation. Purchasers routinely haggle knowing that any remaining value in a business will rapidly decline once the whole world finds out about the insolvency. 

As a result of these constraints, Administrators have found that the best outcome is often to sell a business as quickly as possible. And who is in a position to pay the best price? Often the former directors, who have close links to customers and suppliers and can take a view on the future prospects of the business.

But not everyone sees things this way, and the politicians have become “concerned”. Hence all the recent interest which has led to academic research and civil service excitement. So what have they come up with?

The Graham Report envisages the establishment of a ‘Pre Pack Pool’ under the watchful eye of a secretariat which will have responsibility for selection, training, monitoring and evaluation of pool members who will be ‘experienced business people’ nominated by the great and the good such as the CBI, IOD and trade organisations.

Where a sale to a connected party is being proposed, a single pool member will give an ‘opinion’ on the deal, apparently limited to whether the grounds put forward for the connected party transaction are ‘reasonable’ or not.

It is envisaged that no more than a half day review of the papers will be required by the pool member, whose fee would be paid by the connected party. The fee will also pay for the costs associated with maintaining the Pool.

There’s more. The connected party will complete a viability review. This will state that the connected party has formed the opinion that NewCo is and will remain a going concern for at least 12 months, giving the grounds for such an opinion. It is anticipated the viability statement could, on a subsequent insolvency of NewCo, be used in disqualification proceedings against the connected party director.

Statement of Insolvency Practice 16, which provides guidance on the disclosure required in pre-packaged sales, will have to include a reference to the pool member’s assessment and a copy of the viability statement – if there is one. Details of marketing of pre pack businesses will also be required.

Surely fantastic stuff, bound to promote the ‘rescue culture’? Or yet more bureaucracy and cost, taking us back to the old days in 1986?