Could connected parties ruin pre-pack administrations for everyone?

What happens if you’re watching a football match and the players suddenly decide to ignore the referee and start playing by their own rules? 

 

You’d be forgiven for thinking that something similar is happening in the world of insolvency regarding pre-pack administrations at the moment.


administration – the good, the bad and the pre-packed

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A pre-pack administration is an insolvency process where the sale of a company’s business and assets is negotiated with a potential purchaser before the administrator is appointed. The sale is then completed either immediately or just after their appointment. 

 

Carrie James, President of the Insolvency Practitioners Association (IPA) said: “If there’s nobody else interested in buying the business, the alternative is that quite often, that business would fail, so the return to suppliers or creditors would be much less.

 

“The point of a pre-pack should be once the business has been sold and moved forward by a purchasing party, then they continue to work with those original suppliers, the idea being that whilst there’s this element of loss, there’s also a potential for recovery.”

 

There are several benefits to this approach. 

 

It’s a quick way to rescue a viable but struggling business, it can maximise returns to creditors and keep people gainfully employed. There can be downsides however. 

 

Unscrupulous business owners could use it incorrectly and this is something which is at greater risk when such a sale is to connected parties. 

 

A connected party is somebody who’s had a prior connection or interaction with the insolvent company. This includes being a director, shareholder or being related to any of the people involved in running the company or any other companies within a group.  

 

Back in 2014, the then Business Secretary, Vince Cable commissioned a report on the practice of pre-pack administration which was conducted by Dame Teresa Graham OBE.

 

Among the recommendations of The Graham Review when it was published in 2014 was the creation of the pre-pack pool.

 

The pool is an independent body made up of experienced business people who offer their considered opinion on the purchase of a business and/or its assets when a pre-packaged sale is proposed. 

 

If they view the deal favourably then the pool member will issue a response saying that it isn’t unreasonable to proceed in their opinion. 

 

The fundamental problem with the pool is that it’s purely voluntary whether any proposed sales are referred to it or not. 

 

This explains why only 5% of all the 450 pre-packaged administrations made in 2018 were submitted to the pool for review. Over half of these were connected party sales which might have benefited from some sort of impartial oversight. 

 

This was the third year in succession that referrals to the pool have fallen. As of 30th September 2019, only 13 referrals had been received all year.  

 

The Insolvency Service announced a review in 2017 on how well the recommendations were working with some debate in the industry on whether referrals to the pool should be mandatory. 

 

Stuart Hopewell, co-director of the pool said that he thought that the main reason for the fall in cases received was the lack of penalties. 

 

He said: “There was an element of hope that these deals would be referred to us, and in the first year, 24% didn’t sound too bad. But in subsequent years it’s been frustrating to say the least. 

 

“Effectively we’re not seeing 90% of these deals and that was the initial aim, to make these deals more transparent.

 

“We’d like to see a wider remit. At the moment, technically we’re not supposed to be engaging with the insolvency practitioners. I think we should have a wider remit to engage with them at an earlier stage. It’s also bad we can’t block a bad deal. If our recommendation is, it’s not a good deal, the insolvency practitioner should take that on board and restructure the deal.”

 

He was supported in this view by R3 President Duncan Swift who said that the low referral rate showed that the process should be made mandatory. 

 

Dame Teresa was also in favour of compulsory referrals to the pool but stopped short of calling for an outright ban on connected party-pre packs insisting that the pool itself would be able to sort the good from the bad deals. 

 

The Insolvency Service said: “We are hoping to publish shortly the findings of our review into voluntary measures introduced in 2015 to improve the transparency of pre-pack sales in administration.”

 

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If your company is experiencing financial difficulties but is otherwise a fundamentally sound business then you should get in touch with us. 

 

A free initial consultation with one of our expert advisors will help us understand your business better and your current situation and allow us to work with you to formulate the best response depending on the chances of success.  

 

Whether the outcome is a restructured business, a sale under a pre-pack administration or an orderly insolvency – we will work with you at every stage and give you the best advice and service depending on whatever path you choose.

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