Pre-pack administration: Saviour or stitch up?
The term may sound as though it involves nothing more momentous than a weekend trip to Ikea, but pre-packaged administrations have become one of the most controversial topics in UK business. Nick Huber reports.
Pre-packs – when a sale of a business and its assets is agreed before it enters insolvency proceedings, allowing a sale within days – have been widely used since the financial crisis started in 2008. In 2011, about one quarter of all administrations were pre-packs, of which around 85% were sold to parties already linked to the company (normally directors), according to Insolvency Service figures cited by the Turnaround Management Association (TMA). Examples of big pre-pack deals include bed retailer Dreams, JJB Sports and stockbroker Seymour Pierce.
Critics claim that pre-packs often allow incompetent and greedy directors to resurrect their business through a buy-back; “stitching up” unsecured creditors who typically lose out.
Supporters of pre-packs say that they enable a quick rescue - saving jobs and helping to boost economic growth.
As the government reviews the fees charged by insolvency practitioners and complaints procedures for creditors, insolvency recently debated the pros and cons of pre-packs and Company Voluntary Arrangements (CVAs) – a process where an insolvent company agrees to pay creditors over a fixed period.
Dunckley, who worked on the recent pre-pack rescue of Seymour Pierce, one of London’s oldest and best-known stockbrokers, called pre-packs an “immensely powerful tool to stop all or some businesses disappearing.”
Arguing for pre-packs to an audience of turnaround professionals who probably make him feel as welcome as Jeremy Clarkson at a Green Party conference, Dunckley joked. But when done properly pre-packs can be fast, relatively low cost, stop the most talented employees leaving a business and have more likelihood of success than other insolvency procedures.
He acknowledged concerns that unsecured creditors can get a raw deal in pre-packs but said that under Statements of Insolvency Practice (SIP) 16, administrators have a duty to keep informed about a pre-pack. “In the Insolvency Act there is a whole load of regulations to protect creditors,” he said.
But pre-packs are not always appropriate, Dunckley said. For example, some unscrupulous businesses that are struggling but not insolvent will try and use pre-packs to dump their debts.
What about government plans (abandoned in 2012) to require administrators to give creditors three days notice before a pre-pack? That would be a bit like “shooting yourself in the foot” Dunckley said. “You would have three days when talent could walk of out the door.”
And CVAs? They may lack the high media profile of pre-packs but demand for them is strong. About 840 were done in the UK in 2012, a record high, according to figures from the Department for Business Innovation and Skills.
Advantages of CVAs, according to KSA's Steven, include their flexibility and allowing directors to remain in control of their business. (To get a CVA, it must be approved by at least 75% - or, more specifically by creditors who are owed at least 75% of the debt.)
How can you explain a CVA to a business? Tell directors that it offers creditors a better deal than liquidation or, possibly, than a pre-pack, Steven said.
Changing the management of a business and generating cash quickly during a CVA can help it succeed.
Steven said he raised cash quickly for one retail client by announcing a one-off sale of the retailer's warehouse stock. “It bought the M4 [motorway] to a standstill one Saturday morning.”
The meeting’s vote on pre-packs vs CVAs seemed to go in Steven’s favour. However, neither pre-packs nor CVAs will suit all businesses.