Insolvency in the 1980’s and 1990’s was much simpler. Working in those days for a “Big 5” bank panel accountancy firm, you would receive a call from a Bank looking to appoint the old Administrative Receiver to a company. If the company had sufficient assets and potential goodwill value to justify trading, then a Receiver was appointed and the business advertised for sale as the Receivers traded for 3-6 weeks. If trading was likely to result in losses, then more often than not the company went into liquidation and the business closed.
Trading by Receivers was often expensive and Banks unsurprisingly began to look for buyers for the business before making the decision to appoint a Receiver. If the Bank was in a big shortfall position then as the secured creditor the price could in certain circumstances be dictated by the Bank. If no obvious buyer was evident, then the Banks began to engage Insolvency Practitioner (“IP”) firms to look for buyers and the “pre pack insolvency” came into being.
The reason for the walk down memory lane was to point out that there were often good commercial reasons for the pre pack. IP costs were significantly reduced, the business did not deteriorate in a trading insolvency situation, the IP did not have to find funding for the trading period and more often than not a better overall outcome was achieved.
However, where the purchase price was close to a Bank’s the secured debt, then issues arose. The responsible IP sought to protect his position by insisting on appropriate marketing. More often than not the sale was not to a connected party as the secured lender preferred not to risk their Newco lend with the same management.
The real issues began when the process became director led, and in specific industries (printing for example) where the line between pre pack and phoenix became blurred. The outcry from printers who had been in business for many years, paying suppliers, landlords and taxes and then competing against “Phoenix (2002) Limited” was understandable.
The Graham Report published in June 2014, and effective from 2 November 2016 introduced the Pre Pack Pool (PPP”). The PPP are 20 unconnected, impartial and experienced business people who are available, on a voluntary basis, to scrutinise and consider the appropriateness of a connected party’s bid in a pre pack process. The thought process behind the introduction of the PPP was to provide transparency to the process.
There are many criticisms of the process;
- The process is voluntary and it is the connected purchaser rather than the Administrator who makes the submission. The threat is that the Government has reserved the right to ban connected party pre packs outright within the term of this Parliament if the voluntary regime proves ineffectual. Indeed R3 have the view “If the conditions are appropriate, a pre pack can be advantageous for all involved and can be the best way of extracting value from a dire situation” The Graham Report has already concluded that pre packs are a valuable recovery tool, and the threat is unlikely to concern any director looking to reacquire his business in the current regime.
- The PPP will conclude its report giving one of three prescribed opinions;
- Not unreasonable to proceed
- Not unreasonable to proceed but with minor limitations in evidence; or
- Case not made
Duncan Grubb, a director of PPP Limited recently, commented in Recovery Magazine “In Iaymans terms I suppose this could be referred to as a “this is not a stitch up “certificate”. As no reasons or explanations will be given by the PPP to the proposed Administrators for a case not made opinion, this rather flies in the face of the Government’s wider “Transparency and Trust” agenda. Our point is that the criteria is opaque and if Administrators are uncertain then surely stakeholders will also be uncertain.
- By making the purchaser the applicant, we believe that the process is flawed. In order to give an opinion on the appropriateness of a pre pack, surely the PPP will need to understand competing bids, valuations of assets, alternative options, and other considerations known to the Administrators such as better realisations from book debs as a result of business continuity. In a competitive bidding process an Administrator would be negligent in releasing details of other bids and valuations.
The process is still in its infancy and the only information available to date is that since inception, the PPP has been utilised 20 times, involving businesses of varying sizes and sectors, and the opinions in all but three cases were positive (“no reason not to proceed”), with the remaining three being “no reason not to proceed but with minor limitations in evidence provided”. Information on the total number of connected party pre packs is currently being compiled and will be published shortly. Our personal experience is that once directors are aware that the process is voluntary, there is little appetite to embrace it. On three occasions we have traded the business for around 2 weeks whilst marketing the business for sale, and on all three occasions management were successful in the bidding process as the only bidders, mainly because without them there was no business. In truth, the success or not of the PPP process will be difficult to gauge other than if directors do not utilise it in the majority of cases.
Whilst at KRE we will continue to recommend that directors embrace the process, our general opinion is that the process cannot be voluntary, the applicant should be the proposed Administrator, and the PPP needs to be transparent and answerable for its opinions. It is accepted that this will add cost (but not necessary delay) to the process. The fundamental problem is that Administrators have a duty to maximise relations, and in many cases management, if they are key to the business, will make the highest, and sometimes only bid. In contrast regardless of the transparency of the process, creditors and competitors will feel aggrieved when management buy back a business and leave creditors behind.