In the context of business rescue, why we believe Pre-Pack Administrations are a vital insolvency tool
On 26th January 2012, Government Minister for Employment Relations Ed Davey announced he has torn up proposals to overhaul the pre-pack administration insolvency tool. His reason? “The Government is not convinced of the benefits of the new rules.”
No doubt various self-interest groups will protest. However, they have failed to explain:
- The mischief they presume pre-pack administrations to cause
And in particular
- If the remedy proposed would actually have produced a better result
Background to the Government’s Pre-Pack Administration review
Back in March 2011, the Government, pressurised by ill-informed complaints, announced that it intended to amend the legislation, which allows companies to file for the instant protection of administration. Instead it proposed creditors be given a minimum of three days notice.
Supposedly, this was to give creditors a chance to propose an alternative. Quite what the creditors were supposed to do in that period, no one really knew!
In reality, the only beneficiaries would be trade competitors and suppliers who would exploit the uncertainties for their own ends. For example, a landlord would be given the opportunity to enter premises and change locks, thus gaining an immediate negotiating advantage over an Insolvency Practitioner. Reducing the chances of a straightforward business rescue.
When do we use pre-pack administrations?
Pre-pack administrations provide for the immediate sale of a business. Most pre-pack administrations are the culmination of intense selling efforts by the administrator. In larger cases, almost certainly potential third-party purchasers will have been approached on a confidential basis. It is unlikely a sale to management would have been organised as a “stitch-up”. More likely, the management simply bid more than others because it knew what it was buying.
Fact. The majority of businesses that become insolvent are relatively small, owner-managed or SME’s.
In practice, such insolvent businesses would rarely readily sell to a third party at a premium to appraised asset value. Most insolvency practitioners recognise that to generate more than minimal auction value for the assets, the business needs to be sold back to the management. Hopefully the management will have learned from their mistakes and will now run the business profitably.
Even with small businesses where there is no other conceivable buyer, any Insolvency Practitioner will negotiate the best deal he can. It is a myth that pre-pack sales are done “on the cheap”. The reality is an insolvent company’s assets are rarely worth anything like their accounting book value.
The role of the Insolvency Practitioner – Rescue, Recovery and Renewal
Our professional regulations put us through the hoop to ensure we get the best result. Insolvency Practitioners are required to report to creditors in detail the action taken to justify a pre-pack sale, in particular one to former management.
We have a duty to provide a transparent report detailing:
- Independent valuation evidence
- An analysis of all possible alternatives
- Full details of the sale itself.
There remains a puritanical streak in the British psyche that believes becoming insolvent is sinful and needs to be avenged. ‘Owners/managers must have done wrong and therefore should be punished.’ This attitude simply overlooks the real and complex causes of many failures. It also ignores the fundamentals of the capitalist system, which provides that some enterprises will succeed and some will fail.
Modern business rescue techniques are designed to maximise the salvage value of failure for the common good. Forcing an insolvent business to cease trading (which is what the opponents of pre-pack administrations seem to want) does not seem to be sensible.
A pre-pack administration sale will almost inevitably generate a better return than the liquidation alternative. It is quick, clean and above anything else, transparent.
So let’s be having no more nonsense!
