Pre-pack administrations: deal or no deal?
Are pre-pack administrations of troubled firms a rescue remedy or a rip-off?
A pre-pack administration involves the sale of all or part of a company’s business or assets with a purchaser, prior to the appointment of an administrator – the administrator conducting the sale immediately on, or shortly after, their appointment. It differs from a “normal” sale, in which the administrator will market the business and negotiate its terms of sale after being appointed.
Pre-pack administrations may take the form of a “connected party” sale where assets are sold to the company’s directors, or the sale may be concluded with third parties.
Where a pre-pack administration allows the company to continue trading normally it can help to retain more of the value of the business, to the benefit – in theory – of both creditors and employees. Recent pre-packs at lingerie chain Agent Provocateur and footwear group Jones Bootmaker, for example, have been hailed as saving jobs that might otherwise have been lost.
The problem is, it’s often more nuanced than that. The retail sector is a case in point where creditors such as landlords and suppliers can be left out of pocket as the retailer sells off profitable parts of the business and jettisons loss-making or expensive stores, out of the sight of creditors.
Room for improvement
Irrespective of the arguments for or against pre-packs it is evident that major gaps in UK insolvency law remain. A Financial Times investigation earlier this year found examples of pre-pack administrations being used to offload a total of £3.8bn in pension liabilities, with many pension schemes being left to the UK’s Pension Protection Fund (PPF). The FT found 17 per cent of the 868 schemes managed by the PPF were the result of this strategy; in addition, two in three pre-pack schemes entering the PPF were “connected party” sales.
In April 2017 the Commons work and pensions committee criticised Rutland Partners, the former owners of turkey products manufacturer Bernard Matthews, for rejecting a takeover offer from multimillionaire food tycoon Ranjit Boparan that included the company’s pension fund liabilities. Instead, they opted for a subsequent £87.5m pre-pack arrangement with Boparan that allowed the company’s pensions liabilities to be offloaded to the PPF. As a result, an estimated 700 pension scheme members faced significant cuts in their retirement incomes. The sale did save 2,000 jobs, however.
The PPF, meanwhile, claimed there was no serious problem with the use of pre-packs and that three of the examples the Financial Times used had been part of restructuring arrangements agreed by the Pensions Regulator itself. It has conceded, however, that there is potential scope for offloading liabilities through pre-packs.
The Graham report on pre-packs, published in 2014, made a number of recommendations for reform by the insolvency industry. Backed up by research from the University of Wolverhampton, one of the report’s major criticisms is that there is no legal requirement for an insolvency practitioner (IP) to look at the future viability of the new business after a pre-pack sale. It also recommended improvements, including general transparency and better “marketing” of pre-packs to creditors.
Among the positives, the report concluded that pre-packs save jobs and are relatively cheap compared to other insolvency procedures. The UK’s flexible restructuring, insolvency and company law framework was also seen as an incentive for foreign direct investment.
A better deal
The Pre Pack Pool was established in order to review proposed pre-packs and provide some comfort to creditors that the deal is “reasonable”. It currently comprises 19 reviewers with a wide range of business experience, and it is backed up by an “oversight body” drawn from the insolvency regulatory bodies (including ICAS), together with creditor representatives. The system of referral of pre-packs to the Pre Pack Pool is entirely voluntary.
Stuart Hopewell, director of Pre Pack Pool Ltd, says that to date it has been difficult to assess whether the system has served to reassure creditors. Hopewell’s own research, based on interviews with creditors involved in roughly half of the referred cases, indicated there is still what he calls “a level of disengagement on the part of creditors”.
He adds: “Many still don’t read the administrator’s report fully … however, the low failure rate of referred cases [only two of 53 have since failed] does indicate that creditors have continued to supply the new entity, possibly on tighter terms.”
Hopewell concludes: “I do believe we are serving our objective.”
Stephanie Pollitt, assistant director of real estate policy at the British Property Federation (BPF), agrees pre-pack administrations have an important role to play within the insolvency regime, but criticises the way they’re being delivered. She says: “They are often conducted behind closed doors and are presented to creditors as a fait accompli.”
Despite misgivings regarding transparency, the BPF supports the role of the Pre Pack Pool, but believes that its involvement should be mandatory for all pre-pack administrations involving a sale to a connected party.
Ultimately, according to Donald McNaught CA, restructuring partner with Johnston Carmichael, convenor of the ICAS Insolvency Committee and a speaker at this year's ICAS Insolvency and Restructuring Conference, the public needs to be able to have faith that the IP is doing the right thing for all parties.
He says: “I personally believe the checks and balances exist to make sure ICAS IPs act properly. The challenge is where other IPs damage our reputation or where a good transaction is painted as a bad one. Unfortunately we will probably never get to a position where the press report the good news aspects. The focus instead will be on the 40 jobs lost instead of the 60 saved.”