Honest failure of a business is no disgrace. In tough economic times, this is even more so. If directors have been mindful of their responsibilities, as we discuss here, they can start afresh with no stain on their reputation.
Business secretary Vince Cable has proposed sanctions for misconduct, to make rogue directors more accountable for their actions. But he has also moved to improve trust in the professionals who deal with insolvent businesses. Proposals to help unsecured creditors exert some control over the fees of insolvency practitioners are imminent, Cable said in August, and against the background of ‘a veritable jungle of self-regulatory confusion’ the complaints procedure has also been strengthened.
Before the end of the year we should hear the initial proposals of an independent review by business guru Teresa Graham into the growing and often controversial use of pre-pack administrations. There were 728 pre-packs during 2012, some 29% of all administrations.
Pre-packs are an import from the procedure known as Chapter 11 bankruptcy in the United States. To quote Wikipedia, they are defined by the Association of Business Recovery Professionals as, ‘an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment’.
A common use of pre-packs has been on the high street, where they have been used to save at least some stores – and thus jobs – in struggling retail chains. High profile cases included bed retailer Dreams, lingerie outlet La Senza and property agent DTZ.
One big complaint about pre-packs is that they are announced without any warning to unsecured creditors, who can themselves be forced out of business if left with unpaid accounts. Perhaps an answer to the allegation that pre-packs are a stitch-up might be to give advance notice to interested parties.
A three-day grace period was mooted in 2011 but shelved because of concern that it could publicise a company’s difficulties. The Daily Telegraph reported in the spring that this early warning might be back on the agenda. A notice period would give creditors time to raise concerns about the sale process and even come up with a better offer.
Among the main criticisms of pre-packs is that the existing directors and managers are often left in place, when a fresh approach might be needed to turn a business round. If nothing about the way a company is run alters, it can look like a pre-pack is just a means of walking away from unsecured debts.
As Cable said in his speech on Responsible Capitalism, there have been problems where businesses have been sold ‘under value, especially to a previous owner or connected party, with no open-market valuation’.
In 2009 the Association of Business Recovery Professionals published its Statement of Insolvency Practice 16 (pdf), requiring disclosure of the following information to all creditors as soon as possible after a sale:
- The source of the administrator’s initial introduction
- The extent of the administrator’s involvement prior to appointment
- Any marketing activities conducted by the company and/or the administrator
- Any valuations obtained of the business or the underlying assets
- The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes
- Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration
- Details of requests made to potential funders to fund working capital requirements
- Whether efforts were made to consult with major creditors
- The date of the transaction
- Details of the assets involved and the nature of the transaction
- The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration
- If the sale is part of a wider transaction, a description of the other aspects of the transaction
- The identity of the purchaser
- Any connection between the purchaser and the directors, shareholders or secured creditors of the company
- The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred
- Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business
- Any options, buy-back arrangements or similar conditions attached to the contract of sale
Clearly all this has not been enough to avoid the suspicion of abuse in pre-packs. The results of Graham’s review will be awaited with interest by all insolvency professionals, with whom SJ Collections has long experience of working.