Pre-packs opened to scrutiny

Pre-packaged company administrations, or pre-packs, have hit the headlines as
recession continues to overwhelm businesses and concerns are raised over the
ethics of the process.

A pre-pack is a form of administration that offers a quicker turnaround than
a conventional insolvency. The sale of a company is arranged prior to the
appointment of an administrator, with a deal then completed without the company
being offered on the open market. The buyer is often the incumbent management or
owners. The Insolvency Service, the government regulator of the profession,
forecasts as many as 100 pre-pack administrations every month as recession
bites.

Two companies that recently went into administration ­ clothing retailer
Officers Club, which sold 118 of its 150 shops back to its chief executive, and
tea and coffee retailer Whittard ­ both used pre-packs for the process. But
critics question the level of transparency they afford, because a buyer is
arranged before the company is put into administration.

Companies are also able to write off substantial amounts of debt, or even all
of it, without consulting all the creditors. Furthermore, as the business is
sometimes returned to the incumbent management, there could be a risk of
secondary failure in the same hands.

Creditor concerns
Opponents of pre-packs are concerned that creditors are rendered powerless by
the process. Creditors will not be able to recover money owed from the new
proprietor ­ even if, as in many cases, the business effectively remains in the
same hands.

Others have suggested that suppliers are also left in the dark and out of
pocket, since in pre-pack deals, supply contracts are effectively rendered null
and void without any notice.

Risk and insurance adviser Aon estimates as many as four in five UK suppliers
will be affected by pre-pack administrations. “Often the first knowledge the
supplier has of the pre-pack is when the new owners contact them to discuss the
new supply arrangements,” says James Bowker, a director for Aon Trade Credit.

When arranging a pre-pack, an insolvency practitioner (IP) advises the
company and looks to line up potential buyers before an administrator is
appointed, after passing the deal to the administrator or taking up the position
themselves. Some believe the latter presents a conflict of interest: the
Enterprise Act 2002 requires the administrator to have regard to the interests
of all creditors. Once the administrator is appointed, the sale of the business
is made.

The Joint Insolvency Committee, comprising insolvency regulators such as the
Insolvency Practitioners Association, the Law Society and the Institute of
Chartered Accountants in England and Wales, published a guide to regulation that
IPs must adhere to when advising on or completing pre-packs, Statement of
Insolvency Practice (SIP 16). Failure to comply with SIP16, which came into
effect this January, can result in disciplinary action.

The guidelines reiterate that IPs, whether acting as an adviser to a company,
as its administrator, or in both capacities, must take into account the
ramifications of the advice they give to the company on all stakeholders.

Why pre-pack?
IPs will also have to explain why the pre-pack was selected as a sale option and
why it is deemed appropriate in each instance over a standard insolvency
proceeding. They must also take steps to avoid “unnecessarily harming the
general interest of the creditors”.

Though the administrator has the authority to sell assets without the prior
approval of creditors or the courts, they may later be challenged over their
actions.

In the interest of transparency, administrators must disclose to creditors
upon completion of a pre-pack any valuations made on behalf of the company and
details of assets involved in the insolvency transaction. They are also required
to provide details of the alternative administration processes that were
considered but later abandoned for the pre-pack ­ and the possible outcomes if
they had pursued any of those avenues ­ as well as details of how they initially
tried to raise capital before receivership.

When pre-packs work
Companies that have benefitted from the pre-pack administration process include:

Buy-backs by incumbent managers or owners

• Officers Club – Pricewater­houseCoopers managed to sell 118 of the 150
  stores run by the clothing retail company to its chief executive, David
  Charlton, at the end of 2008. The remaining stores closed.
• USC – The Scottish clothing retailer was owned by retail entrepreneur, Sir
  Tom Hunter, before entering administration last year. Hunter bought back 43 of
  its 58 shops placed in administration.
• Tom Aikens – The Michelin-starred chef owned two restaurants and had a
  pre-arranged deal with a private equity company to buy them back, with Aikens
  remaining as head chef, partner and shareholder.
• Laurel Pubs – Administrator Kroll sold owner Robert Tchenguiz 293 of the 383
  restaurants and pubs in the chain last summer.
• Buckley & Bland – Former directors bought back the company and
  re-branded it Buckley Print and Packaging.

Those sold to other parties

• Whittard – The tea and coffee business was sold by Ernst & Young to
  private equity company Epic in late 2008, with no loss of jobs in its 130-strong
  chain.
• Bradman Lake – The machinery manufacturer was bought out by engineering
  conglomerate Langley with PricewaterhouseCoopers as its administrator.