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Pre-packs: A reality check

Tony Murphy, partner at insolvency practitioners Harrisons – Business Recovery and Insolvency Specialists, offers a reality check on the enthusiastic response to Teresa Graham’s recommendations for greater transparency in pre-pack deals, aimed at boosting creditors confidence in the process and improving both the survival rates of the new businesses and their potential financial returns.

Tony Murphy
Partner

There’s no harm in having the value of pre-packs as a rescue tool endorsed by an independent third party and IPs across the UK are no doubt pleased to hear Teresa Graham reiterate what those of us at the coalface already know – that pre-pack deals can play an important role in rescuing a struggling business, often preserving its value and bringing returns to creditors while at the same time reducing the likelihood of casualties among key employees or loss of contracts.

But, Ms Graham feels, we can do better: pre-packs should be more transparent and deliver better outcomes for customers and the small businesses affected when companies go bust. Her recommendations are supposed to achieve this, and she promises greater transparency and a higher survival rate for the new business, as well as improved financial returns.

Noble aims indeed, and while ‘proper valuations’ and insured valuers are ‘quick-fixes’ that no IP worth his or her salt will object to, and removing the need to report to the Insolvency Service reduces red tape, her proposed alternative is somewhat less encouraging.

A ‘Pool’ of independent business experts will review the details of each pre-pack and have the final say whether or not it can go ahead – an idea designed to bring comfort to creditors and reassure them that the deal isn’t simply a cosy cover-up.

This sounds fine in theory, but will it work in practice? Who will sit in the Pool? How will they be chosen? What will the cost be? And is it realistic to believe that each case referred to the Pool will receive an intensive and pragmatic review – which by necessity will need to be turned around at speed – or will the process become a rubber stamping exercise?

Surely it is the role of the IP, using the information to hand and their extensive training, knowledge and experience to make these decisions? How will the Pool replicate that knowledge without prolonging what is undoubtedly a time-sensitive process and add value to the outcome?

And what if the Pool actually says ‘no’? It wouldn’t be easy – or comfortable – to have to go back to the directors and explain that despite everyone’s hard work, some faceless reviewer has decided that, contrary to the expert recommendations of the IP, a pre-pack isn’t a good idea. What happens then?

More cost, more uncertainty, more delay and more layers of bureaucracy – and for what purpose?

After all, pre-packs are a small portion of all insolvencies, even if the majority of them do result in a sale to connected parties. And here’s the rub. Ms Graham believes that sales to connected parties (typically former directors or owners) often result in poorer creditor payouts and the likelihood that the new business will struggle to succeed.

But we all know that there are times when no-one other that the existing management is prepared to give the business a second chance, so surely their enthusiasm and support should be encouraged rather than sending the business to the wall? At least that way something is saved – despite the clamour of unhappy creditors.

I have always believed that the primary purpose of any insolvency process is to maximise recoveries. If I’m wrong, then perhaps Ms Graham would have been wiser to recommend a change in the law to prohibit sales to connected parties. But if I’m right – and the industry is already echoing similar concerns, despite the fact that the trade bodies appear to be accepting the recommendations without reservation – then surely there is already sufficient legislation in place to stop Phoenix-ism and the Pool is simply a means of pacifying those who shout loudest.

Posted on 26th June 2014 by

 

 

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