'Pre Pack Pool' opens for business this week

In 2013 the Government commissioned a probe of administrations that allow firms that are about to collapse to be restructured and sold to new owners (typically, the existing management) without consultation with unsecured creditors.

Some of the high profile cases include furniture retailer, Dreams and lingerie outlet, La Senza. The Pre-pack Pool is one of the recommendations from Teresa Graham’s report into pre-pack administrations and it opened to receive applications on 2 November 2015.

There were around 800 pre-pack sales in the past year and around one third of these were to connected parties.

Creditors often feel frustrated when they see the business and assets of an insolvent company being sold to the former management, often without consultation with creditors and following what is usually a very short marketing and sale process.

They will understandably have concerns as to whether full value has been achieved and this will often engender a feeling of resentment and suspicion when creditors are left with a bad debt whilst the ‘newco’ carries on under the same ownership.

For some time now, there have been various best practice guidelines for insolvency practitioners to ensure that any business sold via a pre-pack is properly exposed to the open market and that some degree of creditor consultation occurs before the sale is completed (see Statement of Insolvency Practice 16 or “SIP16”).

However, the aims of the Pool are to further increase the transparency of the pre-pack process, in those cases involving sales to ‘connected parties’ and to provide assurance for creditors that independent business experts have reviewed the proposed transaction.

How the Pool will work?

The prospective purchaser, where a connected party is involved, may make an application to the Pool via a secure, online portal. Based on the information submitted, the independent Pre-pack Pool reviewer will issue one of three opinions:

o The pre-pack is not unreasonable

o The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided

o Case for pre-pack has not been made out

The Pool, operated by Pre-pack Pool Limited, works on a user-pays principle. The process will cost ￡800 plus VAT per application.

Insolvency practitioners will need to make sure that connected parties considering acquiring a company’s business or assets through a pre-pack purchase are aware of their ability to approach the Pre-pack Pool.

The process will encourage applicants to agree to the opinion being sent to the administrator or intended administrator automatically and we envisage the opinion being reported to creditors.

The website at www.prepackpool.co.uk includes a number of anticipated questions and answers about the operation of the Pool.

The Positives

Submission of the pre-pack proposals to the Pool will demonstrate to creditors that the insolvency practitioner and the purchaser consider that a sale of the business via a pre-pack is the best outcome for creditors and that an independent third party has reviewed (and approved) the pre-pack.

It is hoped that the process itself and availability of the pre-pack pool will engender trust in pre-packs as a restructuring tool when a connected party is involved.

Often such a disposal is the best outcome for stakeholders despite the understandable concerns of unsecured creditors. For example, the directors may hold the key customer relationships, which can discourage external bidders.

Furthermore, by virtue of the time pressures imposed upon an insolvent business sale, external bidders may be reluctant to commit without a greater degree of due diligence.

There are, of course other reasons why the directors of a collapsed business are sometimes able to pay more than bidders in the open market. These include personal guarantees that may be called upon should the business not continue in some shape or form or perhaps a property asset held in a SIPP that would otherwise lay empty without a tenant in place.

The Challenges

There are, however concerns with regard to the pre-pack Pool.
Insolvency Practitioners are already obliged to provide detailed information to creditors under the requirements of SIP16 and there is already an opportunity for creditors to challenge decisions made by an Administrator under Paragraph 74 of Schedule B1 of The Insolvency Act if they are unhappy with any actions taken by an Administrator. A responsible insolvency practitioner is already very aware of creditors’ concerns regarding pre-packs particularly when it involves a sale to connected party.

The pool is a further layer of bureaucracy to the pre-pack process with additional cost. There is also concern that the individual members of the pool may not be sufficiently experienced in restructuring and insolvency to assess the benefits of more complex pre-packs and there may be inconsistency between one pool member and another.

Conclusion

Only time will tell whether the Pool is able to function in such a manner as to address the concerns regarding pre-packs. Until then, insolvency practitioners may be well advised to embrace this new development in the hope that the outcome will endorse the difficult task undertaken by restructuring specialists in rescuing business and saving jobs under very tight time frames.