Vol 11 (2014) - Issue 6

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Impacts of the Graham Review into Pre-pack Administration in the UK

The UK Department for Business Innovation & Skills commissioned Teresa Graham CBE, a senior accountant, to perform a review of the current process for pre-packaged sales in administration ('pre-packs'), which was published on 16 June 2014. The review recommends a package of six reforms to address the lack of transparency surrounding current practice with the aim of allaying a number of concerns, notably among unsecured creditors. Although the review highlights a number of shortcomings in the pre-pack process, it concludes that pre-packs still have a place in the UK's insolvency landscape. Rather than an abolition of current practice, Graham advocates a 'clean-up' of the perceived failings and has made a number of recommendations which the UK Government looks set to implement.

Background
Pre-packs have developed as a market technique used by insolvency practitioners to aid corporate rescue. The process aims to achieve optimal realisation from the sale of the insolvent company in situations where it cannot be rescued as a going concern. This involves negotiating and agreeing the sale of a company's business or assets prior to it entering a formal insolvency process, with the sale then being executed concurrently with, or immediately after, the appointment of the administrator. The sale is often completed with limited formal marketing of the business or assets being sold. As such, many unsecured creditors are unaware of the reorganisation plan for the company concerned until it has already been executed.
Although not covered by legislation as such, prepacks are currently subject to the 'New' Statement of Insolvency Practice 16 – Pre-Packaged Administrations ('SIP 16') issued by the Joint Insolvency Committee. SIP 16 sets out guidelines for UK administrators on best practice when conducting pre-packs. It stipulates that the administrator must provide an explanatory statement detailing the reasons for executing the prepack along with the first notification to creditors. The New SIP 16 requires (i) a statement of transaction confirming that the interests of the creditors have been observed and the sale price is the best that can reasonably be achieved; (ii) the statement of transaction must be provided within seven days of the sale; and (iii) a set of disclosure requirements, such as detailing the outcome of marketing activities and summarising the valuation methodology. The New SIP 16 is effectively bridging the gap between the Old SIP 16 and further changes which the review seeks to implement. The major shortcoming of the New SIP 16 is that it does not go far enough to address the problems associated with the Old SIP 16. Unsecured creditors remain in an often marginalised position in a pre-pack deal and criticism includes perceived failure to achieve the best value for the business due to lack of viable marketing.
When used responsibly pre-packs are an effective tool for enabling viable businesses to stay afloat by ensuring the company remains trading and thus preserving both value and jobs. However they have attracted considerable criticism due to their potential for abuse in deals 'behind closed doors'. What is perceived to happen in such scenarios is that the insolvent company sells the business or its assets to one or more of its original directors and/or shareholders at a substantial discount without the knowledge or consent of its unsecured creditors who will be left with a claim against an insolvent company from which the performing or valuable assets have been cherry-picked. Such a perception has led some commentators to claim that pre-packs can replicate the effects of phoenixism, an illegal process whereby the same company essentially reforms without any redress to its creditors.