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Pre-pack administration: Saviour or stitch up?

15th May 2013
Freelance journalist
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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.

At a TMA meeting in London last month, Grant Thornton partner David Dunckley put the case for pre packs, while Keith Steven, managing director of KSA Group, spoke in favour of CVAs.

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.

Replies (12)

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By The Rogue
17th May 2013 11:33

Bad business

So a company which is struggling to pay its debts does a deal with a pre-pack and continues to trade debt-free.  If they had such problems in the first place, what has changed to make it work next time round?

In my view this is a stitch-up on the future creditors of the new ltd company.  Creditors of the old company will lose out whatever happens but it is galling to see that directors have created for themselves a new ltd co months before the failure of the old one.  Surely from the moment they create the new one they are trading the old one illegally because they know it is going to fail.

In my view any director of a filed company should be automatically barred from being a director (or acting as one) for a few years afterwards.  They have shown their incompetency once, why give them a second pop?

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Replying to Tallgirl:
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By The Black Knight
17th May 2013 13:21

lies the answer

The Rogue wrote:

So a company which is struggling to pay its debts does a deal with a pre-pack and continues to trade debt-free.  If they had such problems in the first place, what has changed to make it work next time round?

In my view this is a stitch-up on the future creditors of the new ltd company.  Creditors of the old company will lose out whatever happens but it is galling to see that directors have created for themselves a new ltd co months before the failure of the old one.  Surely from the moment they create the new one they are trading the old one illegally because they know it is going to fail.

In my view any director of a filed company should be automatically barred from being a director (or acting as one) for a few years afterwards.  They have shown their incompetency once, why give them a second pop?

The answer does lie with assessing the directors competence to resurrect the business. Often they make the same mistakes immediately following as they will not accept it was their fault in the first place.

Unfortunately the insolvency service turns a blind eye to quite appalling, wrongful and fraudulent trading let alone extreme incompetence, without a slap on the wrists or even a warning shot across the bow's.

Creditors never question the liquidators role or even realise the powers they have.

some Insolvency firms may be swayed by the promise of a rescue fee such that the creditors rights fail to get noticed along with a report on directors defaults.

Perhaps the answer is, a post pre pack monitoring (green L plates and further training for directors that doont get it) And a business plan (not just bullshit) that addresses how its going to work in the future? Perhaps also a directors defaults ought to be a public document so everyone can compare it with the record at companies house. Such as failure to submit accounts on time, failure to comply with s.393 etc etc.

Many of these directors are serial offenders, which the state fails to notice.

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By ksagroup
17th May 2013 11:58

Pre Packs

Many pre pack sales are not done to the existing directors.  In fact banks are reluctant to agree to them if the management do not change radically.  A pre pack succeeds if it can inject more working capital into a business so that jobs are saved and the business can continue.  It still has to be a better result than liquidation.    

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Replying to johngroganjga:
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By Romanista
17th May 2013 12:43

That is why ...

you usually find a friend fronting the company and the previous directors /shareholders in the background.

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By S Downie
17th May 2013 12:05

Whats the alternative

A pre-pack can be the only way of rescuing the business.  The alternative is that the business continues until liquidation, eroding all value to creditors as a whole and all employees lose their jobs.  Unsecured creditors get even less in these circumstances (usually nothing) and additionally lenders and employees lose out.  It is a case of damage limitation.

Done properly they are an excellent idea.  However I think that before a pre-pack is proposed there should be some sort of government intervention to review whether this is the best deal for creditors, as the pre-pack has got a bad name from the few unscrupulous IPs who recommend them without consideration of creditors' interests.

Please also remember that about 20% of all sums raised (after fees) are set off for unsecured creditors and not the bank.  This has been in place for the last few years, but is only relevant for larger pre-packs where sufficient funds arise.

Most CVAs fail because the proposals are over optimistic - in principal a good idea but a supervisor does not have the time to micro manage adherence to the arrangement and therefore it is largely dependent on directors performing along the lines forecast (which is usually excessively positive in the hope of persuading creditors to agree the CVA).

 

 

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By ksagroup
17th May 2013 12:21

Well, that is where the skill comes in proposing a successful CVA 

Yes many people do have too over optimistic projections of growth but then so do many start ups!  Many of them fail.  Seriously though a CVA has to be "fit, fair and feasible"  The creditors need reassurance that the projections of growth are achievable.  HMRC are very sophisticated creditors and they wont agree to them if the projections are unrealistic.   In our CVAs we ensure that things change.  Proper financial controls are put in place, Non executive directors maybe appointed and some directors removed.  It is all about change.  

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By Accounting Mutant
17th May 2013 12:28

Genuine Victims?

What about the genuine victims? If a company fails because of it's debtors failing unexpectedly, then they too can become failures whereas they wouldn't have ordinarily. There should be a route for them to restart.

 

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By sherodwilliams
17th May 2013 12:55

Bad Business

I have heard many times the arguments for Pre-Packs & CVA arrangements put most eloquently by those who have a vested interest in terms of the fees to be gained from the promotion of them. I have heard many times over the argument that a pre-pack insolvency will ultimately assist & protect both enterprise & entrepreneurship The one point which I would raise is that pre-packs are  and historically have been used by Directors not just on one or two occasions but sometimes three or four, leaving ordinary creditors and the Treasury with debts whilst continuing to trade the phoenix company each time, extract cash & at a point in time 'phone the friendly IP to do it all over again. It is quite possible that initially the failure may be due to economic circumstances but when Directors have been coached through a Pre Pack once, they become far smarter in the ways of insolvency later.

I am not sure that any Director of a "failed company" should serve a period out of office because there could be many reasons unconnected with a genuine insolvency over which there could have been no genuine control. 

Perhaps the Insolvency Service might consider working with Companies House in a way whereby the online services of the latter might be enhanced to show links to previously dissolved companies / struck off Directors etc which would provide a greater ease of reference for potential suppliers without the expense of time & money carrying out multiple searches. (I have no objection to paying for readily accessible information) I guess that if people were aware that they were extending credit to a previously failed business then could offer appropriate terms & conditions or accept the risk which would be the commercial approach but in many cases they do not have adequate information.

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By The Rogue
17th May 2013 13:11

Company information

There are quite a few organisations who provide company information, including director information.  Unfortunately John Smith of failedco ltd isn't always linked to John Arthur Smith of newco ltd.  Call me cynical if you like but a director can easily give personal details which are sufficiently different to mask the fact that they are the same person.

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By Jack the Lad
17th May 2013 17:31

Insolvency fees

I am surprised that no one has yet raised the issue of very high fees charged by many insolvency practices, not least the larger firms.   May I be devils advocate here.

Having been in general practice for many years, and done some insolvency work prior to the changes in 1986 (?), I can only describe their fees as profiteering at best, and criminal at worst ! As an experienced professional, I am lucky to get £200 per hour at best for "special" work, and £135 for basic accounting ( £67.50 if "junior processing"), I find it hard to accept charges of £200 for someone, usually unqualified and often a secretary, doing basic document processing requiring little or no accounting or insolvency expertise, and up to £750 for a partner.   While I do not for one minute expect work to be carried out for nothing, such rates are not justified, and are at the expense of unsecured creditors.

In addition, it is about time the Insolvency Service looked at their own standard fees, especially when all they have done is pass the job over to an IP, this ensuring even less for the creditors and perpetuating the high fees of IPs.

I have previously raised this issue with both the ICAEW and IPA, who peddle the standard line " we do not get involved in fee disputes" !  Is this "review" by the IS really going to address this thorny issue ?    Sorry to be cynical, but I doubt it.

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Replying to JCresswellTax:
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By brianheg
03rd Jun 2013 14:29

Fees

Jack the Lad wrote:

I am surprised that no one has yet raised the issue of very high fees charged by many insolvency practices, not least the larger firms.   May I be devils advocate here.

Having been in general practice for many years, and done some insolvency work prior to the changes in 1986 (?), I can only describe their fees as profiteering at best, and criminal at worst ! As an experienced professional, I am lucky to get £200 per hour at best for "special" work, and £135 for basic accounting ( £67.50 if "junior processing"), I find it hard to accept charges of £200 for someone, usually unqualified and often a secretary, doing basic document processing requiring little or no accounting or insolvency expertise, and up to £750 for a partner.   While I do not for one minute expect work to be carried out for nothing, such rates are not justified, and are at the expense of unsecured creditors.

In addition, it is about time the Insolvency Service looked at their own standard fees, especially when all they have done is pass the job over to an IP, this ensuring even less for the creditors and perpetuating the high fees of IPs.

I have previously raised this issue with both the ICAEW and IPA, who peddle the standard line " we do not get involved in fee disputes" !  Is this "review" by the IS really going to address this thorny issue ?    Sorry to be cynical, but I doubt it.

It think if you compared your rates to the fees charged by larger firms for accounting work you would see the same large difference. Those big shiny offices in the City don't pay for themselves.

Many smaller IPs charge rates which are much more closely aligned to 'normal' accounting work. 

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By MalcolmGray
17th May 2013 18:25

Genuine company directors with genuine intentions

While I appreciate some of the comments above and, to a certain extent, understand that there is cynicism with regards to the intentions of directors using prepacks to "stitch up" creditors by dumping debt and sailing off in an unencumbered newco, this is very much in the minority. Directors of struggling or insolvent companies don't generally set out to fail.  We shouldn't be taking the negative stance here but on the contrary, should see the positives of the corporate rescue culture. If a well structured prepack administration or CVA can save precious jobs alongside the restructure of a business or a company and protect against the often huge meltdown in assets values (which is no good to any of the stakeholders), why shouldn't we, as tax payers, support them alongside proper regulation of the processes?    Remember, in cases where directors are repeat offenders and possibly guilty of abusing a procedure such as prepack administration, affected creditors can always refuse to deal with the newco (if the directors are the same as the oldco) and more sophisticated creditors like HMRC are able to demand VAT and now PAYE deposits from the newco before it is allowed to commence trading. There are systems and regulations (such as SIP 16) in place to protect creditors. Unfortunately bad practice makes headlines while good practice is most often not newsworthy!

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