Pre-pack administrations, where a company is sold within hours with no publicity, and often to “connected” persons (e.g. existing management) has been widely criticised. It’s often a simple way for companies to dump their liabilities and yet continue in business. This is what I said in the case of the pre-pack at House of Fraser: “There can be a number of reasons for doing so but in essence it’s very typical of what happens with pre-packs where the rush to complete the deal prejudices obtaining the best outcome other than for the secured creditors. So stuff the pensioners, stuff the trade creditors who have supplied goods they won’t now be paid for, stuff the property owners and stuff everyone else so long as the banks get paid”. See https://roliscon.blog/2018/08/14/house-of-fraser-pre-pack-more-details-disclosed/ for details of that case, or search that blog for other similar cases such as Conviviality, Debenhams and SCS.
There have been a number of cases where pre-packs were exploited in public companies, often by dominant shareholders, but they are even more widespread, and abused, among small businesses. They enable companies in difficulties to arise phoenix-like from the ashes with the trading assets intact. One advantage is that jobs are retained, but there are many abuses such as assets being sold below fair value to secured lenders or to management, and often overnight.
A good article on the subject covering how it affects retailers with some pointed quotes is here: https://www.drapersonline.com/insight/analysis/new-pre-pack-law-a-game-changer-for-industry?
But from this month there are new rules in place that might prevent the worse abuses. They include:
- Stricter independent scrutiny on pre-pack sales where connected parties – such as the insolvent company’s existing directors or shareholders – are involved. The regulations will introduce mandatory independent scrutiny by an “Evaluator” and a responsibility on an Administrator to obtain creditor approval before proceeding to conclude a pre-pack sale to a connected party.
- Improved transparency during pre-pack sales, ensuring the general public and creditors’ interests are protected.
These new rules might involve delays of some weeks though before the administration can be concluded when time may be of the essence, but it will give those who object to the pre-pack time to mount a legal challenge when at present they are often presented with a fait-accompli which a court would be very reluctant to unwind.
Comment: These changes are welcomed and may prevent the worst abuses but I still feel a more substantial reform of the UK insolvency regime is required along the lines of the US Chapter 11 process. A process of reorganisation and restructuring to enable the business to continue while providing some protection to creditors would be preferable. At present the UK regime favours preferred creditors such as bank lenders as against all the other stakeholders.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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