Pre-packs – under review

Pre-packs – under review

An independent review into pre-pack administration has been announced by the government. The review, to take place in late Spring 2013, is to consider how the pre-pack administration regime is working in practice and whether further changes are required. We spoke to Frances Coulson of Moon Beever and Chris Laughton of Mercer & Hole consider the issues.

What has led to the government review?

Frances Coulson (FC): The last review into pre-packs prompted a suggestion by the then minister Edward Davey that three days’ notice should be given for a pre-pack sale to connected parties. The review concluded with no action, the Minister apparently accepting that implementing such a proposal would detrimentally affect business rescue. However, it would appear that following continuing complaints by some creditors, pressure has built up so that a further look is being taken.

Chris Laughton (CL): The BIS Select Committee report on the Insolvency Service had as one of its conclusions: ‘We therefore recommend that together, the department and the Insolvency Service commission research to renew the evidential basis for pre-pack administrations.’

There are strongly held views by some constituencies, including various unsecured creditor representatives, that pre-packs do not operate in creditors’ interests but rather go directly to benefit the interests of directors, owners and secured lenders. Many insolvency professionals hold equally strong views to the effect that pre-packs are a valuable tool to yield the best returns for creditors generally in some circumstances.

What are the current problems with pre-packs?

FC: The main problem is with perception and a lack of understanding on the part of creditors. One can understand why creditors feel aggrieved to see directors appear to dump debt and buy back the business and continue as before, but in reality the administrator has to be convinced the deal is best for the creditors and so the sale to the directors may give the best return on the sale.

The Insolvency Service reviews SIP16 reports by which the administrator gives a ‘post mortem’ report on what was done and why so that there is protection against abuse which was not in place pre 2009. These reports are continually improving and should give comfort to the creditors and the government that pre-packs are working.

CL:The problem is one of perception. Many commentators abhor ‘phoenixism’ where a new entity in the control and ownership of essentially the same management acquires the business and assets of a company through a pre-pack administration. They rarely consider that, by definition when the administrators’ obligations under theInsolvency Act 1986 have been adhered to (otherwise the administrators would have followed a different course), the pre-pack gave the best outcome for creditors generally.

The problem is that no matter how hard insolvency practitioners explain that any given pre-pack was in the best interests of creditors (otherwise they wouldn’t have been complying with the Insolvency Act 1986), some creditors and commentators take the view that insolvency practitioners are not to be trusted. The lack of trust of insolvency practitioners is partly due to poor communication on the part of the profession and some individuals within it, but it is largely the responsibility of the regulatory system we have at the moment.

The regulatory system was not fully addressed in the BIS Select Committee report, although there was reference to the complaints procedures within it. The reality is that we need a single and effective regulator in which the public can have confidence. Without it there will be ineffectual tinkering with the insolvency process, which will achieve little more than papering over cracks.

How long is the process likely to take?

CL:The Insolvency Service has said a timescale will be announced at the time the review is launched in late Spring.

What sort of measures would be good to introduce?

FC: In my view, and as suggested by R3, the best deterrent for any abuse and the best prospect for creditors is to appoint a second insolvency practitioner as liquidator post administration—perhaps reserving a small sum from the purchase price to fund a review/investigation. I think SIP16 goes a long way to protect creditors.

I also agree with the comments of the (BIS) select committee that there needs to be harsher sanctions on abuse by insolvency practitioners—fines by regulators have been pretty feeble.

CL: Wholesale reorganisation of the insolvency regulatory system is the first requirement. Secondly there should be clearer obligations on insolvency practitioners to disclose immediately after any pre-pack why it was the appropriate course. That should be coupled with concerted regulatory action to deal with inappropriate pre-packs. This should emphatically not, however, be the sort of box ticking exercise that the Insolvency Service engaged in relation to SIP16.

There, a very rough and ready regulatory review of insolvency practitioner’s reports pursuant to SIP16 has damaged the credibility of the procedure by failing to distinguish between cases where the pre-pack may have been inappropriate and minor shortcomings in clarity of disclosure.

The suggestion that creditors should be able to appoint an independent liquidator may be superficially attractive, but the majority of creditors already have that ability if there are assets to be distributed to unsecured creditors. If not, the measure will amount to a tax on secured creditors or, in extreme cases where it was in the interests of creditors generally merely to preserve jobs and allow the opportunity of continued transactions with the business, there would be no source of funding for the liquidation.

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