Update on the Pre Pack Pool

Administration | 6th July 2016

Unpacking the Pre-Pack Pool

Accountancy Age

06 Jul 16 | Author Chris Warmoll

IF a week is a long time in politics, six months is nowhere near enough in the world of connected party insolvencies.

That at least seems to be the initial assessment of the two most senior members at the Pre-Pack Pool (PPP), the body set up to examine the probity of connected party insolvencies.

Both PPP director Duncan Grubb, a former chair of the British Property Federation’s insolvency committee, and co-director Stuart Hopewell, a fellow of the Chartered Institute of Credit Management, readily admit that that assessment is partly down to the relatively benign economic conditions that have existed in the British economy since the body’s inception in November 2015.

The pool was among a series of measures put forward by Teresa Graham, the senior accountant who spearheaded a review into the use of pre-pack administrations – where the sale of the business is marketed prior to the company entering administration and subsequently sold on appointment of administrators – aimed at making the process more transparent, fair and to give creditors a better deal.

At the time of her review in June 2014, Graham said that “while pre-packs can bring clear benefits such as preserving jobs, they are also perceived as lacking transparency and failing to protect creditors”.

She was acutely aware that some had “argued that they disadvantage competing, solvent companies in the same market” and that “many people, including me, had preconceived ideas about pre-packs” and “many of those preconceptions were negative”.

And given that she is a self-confessed de-regulator at heart, her conclusion was “that there is a place for pre-packs in the UK’s insolvency landscape”  albeit with the major caveat that there” could – and should – be some major improvements to how they are administered”.

A pretty good start

Fast forward nearly two years and Accountancy Age caught up with the Pre Pack Pool to take the pulse of those at the sharp end.

Grubb admits that fully assessing its impact is tricky given that it has been launched during a period of some of the lowest insolvency numbers on record.

To date, some 20 cases have been heard, and given the “well documented and very benign environment”, he believes that is “a pretty good” start.

Hopewell concurs, adding the numbers are “anecdotally” around a third of the current market – which includes the proverbial ‘man and van’ insolvencies to which the Pool does not target and does not represent any of its 20 cases to date.

Indeed most are in the £200-£300,000 area – its sweet spot, if you like, with some much higher.

So far the 20 member pool has given just one “negative opinion” – essentially a rejection – where it deemed “the case for pre-pack was not made in the eyes of the pool”.

Core remit

Given its core remit is to scrutinise deals wherever there is a “connected party” involved, such as a director of the collapsed business, and be “quick, automated and online”, anecdotal, initial feedback from the IP profession has been “very favourable”, attest the duo.

The body is pulling together a panel of pool of members, creditors and ‘newcos’ to collate initial feedback and hopes to share its finding later this year. That feedback should prove useful in assessing how far it has achieved those goals in addition to providing comfort to old co creditors.

It is a fairly straightforward process, whereby connected parties will make an application to the pre-pack pool via a secure, online portal. Based on the information submitted, that the pool reviewer will issue one of three opinions: the pre-pack is not unreasonable; that the case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided; or that the case for pre-pack is not made. The Pre-Pack Pool works on a user-pays principle, costing £800 + VAT per application.

Grubb stresses that mechanics of the website are “working very well” and there have been no issues regarding any delays in its work. “We undertake to get an opinion within 48 hours and we’ve achieved that in every case,” he says.

He readily admits that while the current level of work “is sustainable” it “needs to improve” given that “it was costed on a minimum number and were not there yet”.

Hopewell, something of a roving ambassador for the PPP, has spent much of the last six months traversing the country to explain the pool’s workings, benefits and raison d’etre. So far this has included, IPA regional conferences, a number of ICAEW roadshows, ICAS’s national conference in Scotland as well as audiences with private firms such as Mazars in Birmingham.

Proof of the pudding

Hopewell is candid when he – and a sizeable chunk of the IP community itself – was somewhat sceptical about the proposed pool. He is a now a devout convert – and he says that “once we explain the case, I feel it is now more positively received”.

Indeed, business recovery and reconstruction specialist Suzanne Jones, who has submitted an application to the Pool, which she claims 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,” she wrote in Accountancy Age earlier this year.

However, Hopewell says the message is “filtering through that we are not a not a negative or a rogue lot but we are a positive force and a help to the community”.

The “proof of the pudding” in that belief, will be demonstrated when they get creditor feedback and another reason why the outfit is putting together discussion forums to capture that pulse in what is “still very early days of awareness”.

Grubb says: “What has not really been publicised enough is the fact that pre-packs and connected parties could be banned in this Parliament. It’s a voluntary regime but there’s a sting in the tale and it’s really up to all the elements involved to make it work.”

He is of course referring to a clause in the Small Business Act 2015 that allows the government to ban pre-pack sales to connected parties should the recommended measures not be adopted.

“It’s certainly an incentive”, adds Hopewell, who says part of the body’s role is to “clear the mystique and make sure creditors are not being ripped-off”.

“Initial take up was very disappointing,” he adds “but the last couple of months have shown an improved rate”

He believes the wider IP industry “was aware of it but had the wrong view of what its objectives were” but is adamant that “we’re changing that and improving it”. Grubb, recalls what he dubs the “bad end of pre-packs” as the former chair of the British Property Federation’s insolvency committee.

He cites known instances – from a landlord’s perspective – whereby “national chains put subsidiaries into administration having sucked out all the assets via management charges or dividends and then the holding company bought back the leases they wanted and intellectual property – anything desirable– from the administrator under a pre-pack and left all the duff leases behind”.

Such scenarios resulted in “quite a hit for the landlord community”.

While pre-pack administrations were originally created through a series of modifications to The Insolvency Act 1986 in The Enterprise Act 2002 to create what’s has been billed as a more supportive rescue climate for business, getting it right is an ongoing evolutionary process.

Both Grubb and Hopewell expect that form of insolvency Creationism to be dashed on the rocks of PPP realism. History will decide who was right.