Pre Pack Administration Proposals Published
17-Jun-2014The long awaited Government report on Pre Pack administrations has finally been published.
Some 600 of the 2,365 UK firms that went into administration last year were subject to pre-packs, this has often angered unsecured creditors, who fell they have been stitched up, and solvent competitors operating in the same market. It is especially controversial when the business is sold to incumbent directors or other connected parties.
There are raft of recommendations to improve transparency but the government has ruled out any changes to legislation. Instead they are looking at a voluntary system whereby in the case of selling a business to a connected party then the Insolvency Practitioners will have to bring in an independent party to review the process. This is likely to add another layer of complexity to the process but will go some way to allay creditors fears of a "stitch up" In larger businesses this may be more practical but whether it can be implemented across the smaller transactions remains to be seen.
In other recommendations, Teresa Graham who was commissioned to look into the process, said that marketing of businesses was not always adequate and said that where businesses were not marketed as much evidence showed that the return was lower. However, it is doubtful whether these findings took account of the fact that businesses may not have been marketed as much as there was not much in the way of buyers anyway? Why would an IP spend time and effort on marketing a business for which there is no real market??
Another criticism has been that although 91% of pre pack administrations had independent valuations done they had mostly been "desktop valuations" Again this is perhaps mainly due the lack of information available to valuers in a short time scale but further explanation of how values are arrived at is probably a good idea
Teresa Graham mooted the idea that Insolvency Practitioners acting in pre packs should consider the viability of the purchasing company. The problem with this is that the IP is charged with getting the best price for the business in behalf of the creditors and the viability of the purchaser is really nothing to do with them as long as they pay the money.
Giles Frampton, president of insolvency trade body R3, welcomed Graham's findings, arguing that debate around pre-packs has long suffered from a lack of empirical evidence.
"As the report says, pre-packs can help save jobs and do provide benefits for creditors too," it said. "The report will help dispel some of the myths that exist around the pre-pack procedure."
So what next?
Teresa Frampton said "Should these measures fail to have the desired impact and they are not adopted as I would hope by the market, then government should consider legislating,"