The Pre Pack Pool (PPP) is an independent body of experienced business people who provide an opinion on the purchase of a business and/or its assets by connected parties to a company where a pre-pack sale is proposed. Established following a key recommendation made by Teresa Graham CBE in an attempt to address the general public's lack of confidence in the insolvency and rescue regime, the PPP opened on 2 November 2015. It has recently released details of the number of applications submitted and the opinions given.
Between 1 November 2015 and 31 December 2016, 188 pre-packs involving a connected party and 53 — ie just over one-in-four — were referred to the PPP. This figure was lower than expected but considered 'encouraging for a new, voluntary step in a long-established insolvency procedure'. The PPP reported that 'use of the Pool accelerated as the first year progressed as awareness increased among the insolvency, creditor and business communities'. Interestingly, however, it did not address any other reason as to why the number of applications submitted was so low. For various reasons, set out more fully below, I am of the view that the application numbers are so low because it is time consuming, costly and serves no purpose.
The application process
An application to the PPP is voluntary. It costs £800 plus VAT, plus the legal fees to complete the application for an opinion. This will be one of the following three statements:
- Nothing found to suggest that the grounds for the proposed pre-packaged sale are unreasonable.
- Evidence provided has been limited in some areas, but otherwise nothing has been found to suggest that the grounds for the proposed pre-packaged sale are unreasonable.
- There is a lack of evidence to support a statement that the grounds for the proposed pre-packaged sale are reasonable.
Of the 53 applications referred to the PPP for review, 34 (64%) received a 'not unreasonable' opinion, 13 (25%) a 'not unreasonable but limitations to evidence' and six (11%) a 'case not made'. The small number of applications suggests that a number of proposed purchasers are not making applications, perhaps because they form the acquiring company so that they do not fall within the definition of 'connected', sell the business and assets pre-liquidation, and/or interpret 'pre-pack sale' as they wish, for there is no statutory definition. (How soon after appointment does the sale need to complete? One hour? 24 hours? Three days?)
When acting for a proposed administrator or purchaser on a pre-pack sale, time is usually very limited and the additional element of submitting an application to the PPP is burdensome. Due to its voluntary nature and lack of obligation to show the opinion to the proposed administrators, how would a proposed administrator, or lawyer, persuade a proposed purchaser to submit an application? If a client ever questions why an application should be submitted, there is no answer other than it is industry practice. This provides the proposed purchaser with an easy justification as to why they did not submit an application; not that they would have to justify it to anyone.
Submitting an application
I submitted an application to the PPP in early 2016 and received the following opinion: 'Evidence provided has been limited in some areas, but otherwise nothing has been found to suggest that the grounds for the proposed pre-packaged sale are unreasonable.' Given that I was able to provide all the information requested, save for the valuation, I was surprised to find a request for the valuation of the business and assets. This is not something that is given to a proposed purchaser in an administration sale. Of course a proposed purchaser will assess what they believe the value to be and this is reflected in the offer they make. However, a proposed purchaser would not be provided with the independent valuation obtained by the proposed administrator. Instead, they may determine the value by considering the book value and what third parties are likely to offer for the business and assets.
As the purchaser did not have a valuation, I stated in the application form: 'We note that you have requested a valuation. However, we are not permitted to have sight of the valuation obtained by the proposed administrators.'
The reviewer concluded that the proposed sale did appear to be reasonable and made the following comments in his opinion: 'Evidence provided in support of the application was limited in some aspects as follows: No valuations were made available.'
In my view, the independent valuation is crucial to be able to assess whether a proposed transaction is reasonable. How can the reviewer of an application assess and conclude that without a valuation, a proposed sale is reasonable?
The PPP: Its future
Sir Vince Cable, the former Secretary of State for Business Innovation and Skills, commissioned the report into pre-pack sales in administration procedures and recommendations for reform as part of the government's wider 'Transparency and Trust' agenda. Sir Vince seems to have commissioned the report because he believed that the law and regulation governing pre-pack sales needed reform to remove the negative perception. Without doubt the pre-pack sale attracts a disproportionate level of criticism and attention.
Given the small number of referrals, Sir Vince has said more recently that the rules should be amended so that insolvency practitioners (IPs) are responsible for referring connected party pre-packs to the pool and that these referrals should be made mandatory. However, Teresa Graham responded by saying that such regulation would destroy a mechanism that has a legitimate place within the insolvency landscape. Ministers have also been urged to tighten the rules around pre-packs after figures showed that the voluntary system was largely being ignored. I agree with Teresa Graham and also with Stuart Hopewell, co-director of the PPP, who said that making referrals compulsory 'might also dissuade owners from proposing any potential pre-pack deals and lead to more sales out of liquidation with no scrutiny, leading to potentially greater job losses than with pre-packs, which are known to preserve jobs'.
If IPs are selling businesses and assets to connected parties which do not achieve the best result for the creditors, then the way to overcome this problem is by tougher regulation and sanction by their regulators. The criticism should not be of the pre-pack sale but of the regulators for failing to sanction those involved in deals that do not achieve the best result for the creditors. I do not think that pre-packs are the problem, rather it is the public's — and ministers' — lack of understanding of the pre-pack and its ability to save jobs and provide a better return for the creditors.
Changing public perception
I doubt the PPP will change the public's perception of the pre-pack sale. The perception will not improve by the proposed purchaser obtaining a vague, non-binding opinion from the PPP. Furthermore, it is highly unlikely a PPP reviewer will ever receive details of an independent valuation obtained by the IP, and if they did I would question why the IP is not sanctioned by their regulator for disclosing this information. As stated above, I do not believe that the reasonableness of a proposed transaction can be determined without this information.
What should the industry do?
The industry needs to reply to media allegations by explaining why each pre-pack sale is important and how the sale will ultimately result in the best return for creditors. We need to set out what would have happened to the business and assets and how it would affect so many stakeholders if there was no pre-pack sale. This is what the media needs to report: the facts and figures of the alternative to a pre-pack sale. I am in no doubt that once the general public see these figures they would soon understand why pre-pack sales are beneficial to all stakeholders.
The regulators need to take action against any IP who allows a 'dirty deal' to be done. If they are unable to give a valid explanation as to why a pre-pack sale was the best option, then their regulators should investigate them for a potential failure to act in the best interest of the creditors. The blame for these deals has to lie with the IPs who have breached their duties. This is the only way to begin to remove the negative perception of pre-pack sales that the media has caused.
In my opinion, the PPP was created merely to appease those who do not understand that the sale is in the best interests of the creditors. This is such a shame as pre-packs sales are important within the insolvency framework. If IPs are not complying with their duties, their regulators should come down heavily on them. Creditors should not lose out as a result of rogue IPs and failure of the regulators. Furthermore, it is disappointing that the government has given itself a reserve power to ban any connected party administration purchase, despite the fact that it is considered that pre-pack sales are generally in the best interests of the creditors. I would also like the media to report more accurately on the use of pre-packs and the benefit of the creditors to address the public's concerns about pre-packs.
Sadly, the PPP has not achieved what it was created to do, nor serves any useful purpose. It creates additional costs for a proposed purchaser, an application will only be submitted by those choosing to follow industry practice and a proposed purchaser could easily justify why they did not submit an application. The only way the public perception of the pre-pack sale will ever improve is by explaining why a pre-pack sale is in the best interest of all stakeholders. However, I am of the view that if we do not submit the application, or should I say, manage to persuade the proposed purchasers to submit an application, I do believe that it is highly likely that the reserved power to ban any connected party administration purchases may be implemented. The government may also make applications to the PPP mandatory, which would be very disappointing and I do not think would overcome the problem of the public perception about pre-packs. Even if it were to be made mandatory, it is my view that the public will say 'the viability statement is meaningless' or 'these are merely figures provided by the connected party which have not been tested by anyone independent.' I suspect other criticisms will be 'the opinion of the reviewer is so vague, how can it have any meaning?' and 'how can they conclude that the proposed purchase appears reasonable when they do not have sight of a valuation?'
I would like to see the continued use of pre-packs in the future, as I agree with Teresa Graham that pre-packs play an important role in the UK's insolvency framework. Given this, it would be a real shame to ban any connected party purchases in administration whether by implementing the reserve power of the Small Business, Enterprise and Employment Act 2015, or by any other manner.
I would like IPs to be trusted to do the job they are qualified to do and in the event that an IP does a 'dirty pre-pack', that their regulators remove their licence. We also need to explain the figures to the media and creditors and set out why a pre-pack in any particular case is in the best interests of the creditors.