Vol 12 (2015) - Issue 6

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'To Boldly Go': Are Pre-packs Heading into Uncharted Territory?

Introduction
'Pre-packaged' or 'pre-pack' administrations amount to around 25% of all administrations annually. Depending on your viewpoint, this can be considered as either a significant or small proportion of all administrations. However, whatever your viewpoint, one thing is certain: pre-pack administrations have come under heavy and sustained criticism for a number of years. This adverse public opinion, which is particularly strong where the pre-pack is to a company in which the shareholders and directors of the old, insolvent company have an involvement, is based on the perception that unsecured trade creditors are left with virtually nothing from the process while existing management and equity get to continue the business free of the liabilities which they originally took on. However, proposed changes following the Graham report last year may be about to give the pre-pack a make-over.

The criticisms
Trading insolvency often destroys value, and in some cases the business will not survive it at all; uncertainty can quickly cause key customers, suppliers and employees to leave or to demand ransom payments for continued supply. A liquidity crisis rapidly arises, and all together it makes the business an unattractive proposition for many would-be purchasers. If no sale is achieved, the trading insolvency may have increased the amounts owing to creditors, thereby reducing their returns.
A pre-pack by its very nature avoids these risks and, where there is a viable business to be saved, allows for an efficient sale and rescue process. The business to be pre-packed spends almost no time in administration and so is not 'tainted' by being in an insolvency process. Employees employed by the rescued business continue to have a job rather than face redundancy. The speed at which the pre-pack is carried out means that customers and suppliers are usually unaware of the process until it has been completed, with trading continuing unaffected with the 'rescued' business rather than an insolvent one.
Unfortunately it is precisely this necessary speed which has resulted in many creditors being concerned about the lack of transparency in the sale process. Rather than seeing and approving the administrator’s proposals in advance of a sale, as may be the case in a trading insolvency, creditors will only be provided with the information about the sale once the sale has completed. Although they will still be able to challenge the administrator’s actions if, for example, they feel that the sale has been carried out at an undervalue or the administrator has otherwise breached his duty to act in the interests of all creditors, many creditors will feel unable to bring such an action either because they lack the funds or stamina needed for such a challenge or because they feel that it is not worth challenging a 'done deal'.

The Graham Report
There have been various attempts previously to address creditor concerns, including the introduction of SIP16 in January 2009 which increases the information which an administrator should provide to creditors following a pre-pack sale. Whilst not legally binding on the administrator, lack of compliance with SIP16 can lead to disciplinary proceedings, and compliance is currently monitored by the Insolvency Service.
However, the most significant changes will be introduced later this year, following the Graham report into Pre-pack Administrations which was published in June 2014 (the Report).