20 November 2015

New expert pool established to help curb abuse of pre-packs

Pre-pack administrations occur when an administrator sells an insolvent business on, or soon after, his or her appointment - often to the existing owners/directors (so-called “connected parties”). In such cases all of the preparatory work for the sale is carried out in advance of formal administration and before the creditors have been told about the failure of the business. Often, the insolvency practitioner will also have acted in a business advisory capacity to the failing company prior to his appointment. 

Printers certainly suffer as creditors when they lose money owed to them by customers who pre-pack. But they also suffer when a fellow printing firm pre-packs, thereby improving its ability to compete against them by dumping previous debts. So when a print business pre-packs, the response from its competitors is invariably an angry one. Especially when the new owners are the same people as the previous owners. 

The BPIF has been lobbying for reforms in this area for several years now. After a series of false starts by Government, including the publication of draft regulations that never came to fruition, a review of pre-packs was conducted last year by Teresa Graham CBE. Our policy has always been to seek new regulations to curb the abuse of pre-packs and we have called for a number of actions to that end, including requiring court or creditor sanction for any pre-pack sale to a connected party. Having pressed our case at successive meetings with the Insolvency Service and with relevant Ministers, we also did so in person to Teresa Graham. However it’s clear from her report that Graham - a self-confessed ‘de-regulator by heart’ - had no appetite for new regulations. Her recommendations – all of which were accepted by government - were for a number of voluntary reforms to be implemented by the insolvency profession. 

One of these was that a pool of business experts should be established to assess proposed pre-pack deals involving connected parties. A steering committee, on which the BPIF is represented along with other trade bodies, has now established this. The Pool is open to directors and other ‘connected parties’ hoping to purchase a company out of administration through a pre-pack sale. Application to the Pool is voluntary via an online portal (www.prepackpool.co.uk) and connected parties will be made aware of the Pool by an insolvency practitioner. The Pool is made up of 20 independent senior business experts who will deliver a response within 48 hours. The Pre-pack Pool works on a ‘user-pays’ principle, and the process costs £800 VAT per application. The expert’s opinion will be provided to creditors once the business sale has been completed. 

At the same time, new practice requirements for insolvency practitioners on how they and company directors market and value struggling businesses that were recommended by Graham are also being introduced, with the aim of ensuring that the best possible return is achieved for creditors from a business sale. These have been included in a new version of Statement of Insolvency Practice 16, effective from 1 November this year. 

Time will tell whether this new assessment process will have any real impact. Whilst we will continue to argue the case for regulatory reform, we have little option for now other than to try to get this and the other Graham Reforms to work effectively. We certainly don’t intend to leave it to the insolvency profession to implement them unchecked. But there is an important failsafe in place. The  Small Businesses, Employment and Enterprise Act 2015 gives the Secretary of State for Business reserve powers  to ban pre-pack sales to connected parties if the Graham Reforms fail to deliver. We will be calling on him to use those powers should this turn out to be the case.