Transparency welcome but route for rescue should not be hindered

Ann Condick, Director of Insolvency at ICAS, said: “Measures that help provide greater confidence and transparency into the pre-pack process are welcome. In our experience, insolvency practitioners already liaise with key creditors before a pre-pack sale is concluded and are in favour of open, two-way communication with all creditors. The Government’s announcement will enhance the current process. However, what must be ensured is that the flexibility and speedy route for rescue that a pre-pack currently offers is not lost through the Government’s proposal to introduce a three day notice period for pre-pack sales to connected parties.

“The primary reason that a pre-pack is used in many cases is that the business is likely to quickly decrease in value post-appointment, with little or no funds to trade or market the business for sale. Three days is a long time in business, and a company could risk losing the sale or key staff and customers.

“Businesses are operating in an economic environment where it is harder to access finance. Viable businesses that may not have run into problems before are now experiencing difficulties. In this environment, a pre-pack is sometimes the only way in which a business and jobs can be saved, particularly in a company where employees are the key asset.”

The results of an ICAS survey, of 14 leading insolvency practitioner member firms which handle administration appointments, show that for the period 2007 to 2010, these firms had handled 728 administration appointments. Of this number, 43 were cases in which the businesses had been sold through pre-packs. Out of a total of 7043 jobs saved, 3012 were as a result of pre-packs, representing 42% of the total number of jobs saved.

Commenting on the Insolvency Service’s report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs, Condick said: “ICAS deals stringently with any breaches of guidance through our regulatory function, which includes lay involvement at all stages of our processes. In 2010, ICAS received two referrals on one practitioner in relation to SIP16 guidance, both referrals were fully investigated but required no disciplinary proceedings. There is a clear understanding amongst ICAS regulated IPs of the guidance relating to pre-packs and the level of compliance provides evidence of this.”

Article contributed by ICAS, The Institute of Chartered Accountants of Scotland

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Pre-packs are not new. However, they have increasingly become the subject of hot debate since being used in conjunction with the collapse of several high profile retail chains, and most recently the hotly debated Greek telecoms group Wind Hellas (the largest pre-pack to date) which was reported in The Times last week.

The cynics claim that a pre-pack is merely a vehicle being promoted by “cowboy administrators” as an opportunity for unscrupulous directors of struggling companies to dump their debts, and then immediately buy back their newly debt free businesses at knock down prices. They see pre-packs as an underhanded way for companies to shirk their responsibilities and leave landlords and suppliers high and dry. Given that the sale and buy back negotiations have often taken place somewhat behind closed doors, it’s no wonder some might reach this conclusion.

However, for anyone looking for an easy way to dump debt it’s important to remember that “If it sounds too good to be true….” And this is definitely the case with pre-packs.

There is much ongoing research to ensure that the use of pre-packs is ethical, moral and, most importantly, helping the industry to deliver more “rescues” than “insolvencies”.

The research, and indeed CBW’s experience, is that the business community as a whole is benefiting from the availability of pre-packs. In all cases, the business is sold to the party which offers the best commercial outcome for ALL the stakeholders. R3 have recently reported that 41 % of pre-pack sales are not to connected parties. Whether the new owner is an independent third party sourced from the “open market” or the previous managers/owners, the result is the same: Maximum value for creditors and the benefit of ongoing employment for staff.

What is a pre-pack?
A pre-pack is the process whereby the sale of assets of an insolvent business is agreed prior to the company going into Administration. The sale is completed by the Administrators immediately upon their appointment (hence the term “pre-packaged sale”). In this way the business passes from the company in Administration to the new owners without interruption and subsequent loss of business. This transfer includes continued employment of the employees.
Note: An Administrator can only accept these appointments if the company is insolvent and if they believe an Administration will either rescue the company as a going concern or it will result in a better outcome for creditors in comparison to a liquidation.

Recent changes
The key criticism of pre-packs is their lack of transparency. In response, the insolvency professional’s trade body, R3, introduced new rules requiring Administrators to communicate their commercial justification for the use of a pre-pack. The ultimate aim is to demonstrate to stakeholders that their interests have been duly taken into account. The detailed information to be communicated includes:

• the detailed circumstances surrounding the sale of the business and its assets – including all marketing activities, independent valuations and consideration
• the business case for selling the business as a going concern
• the consultations held with major creditors
• the relationship of the buyer to the former owners/management
• the extent of the Administrators’ involvement prior to their appointment

What to do
If you are (or are representing) a business in financial difficulties but which is fundamentally sound, or if you are a creditor of such a business, please contact either John Alexander or Carl Bowles who can give you free initial advice on what your options are for preserving that business or your stake in that business.

This article was contributed by John Alexander and Carl Bowles from Carter Backer Winter LLP. Their contact details can be found here