Any story about a pre-pack administration that involves any “connected parties”, such as former directors or shareholders published on the PrintWeek website swiftly garners strong opinions from readers. Many regard pre-packs as unfair for competitors and creditors alike. 

Pre-pack administrations were introduced through amendments to The Insolvency Act 1986 in The Enterprise Act 2002 in order to create “a rescue culture” for business.

A pre-pack has the advantage of securing the continuity of the business, and often jobs too. When an administrator is appointed, the company is protected by the court system, allowing the administrator to sell the business and assets before it is presented with a winding-up petition. It was intended to be a tool to enable the viable bits of a business to be stripped out and sold on, separate from the insolvent elements.

But print sources speak of the pressure pre-packs puts on an already pressured industry, particularly when it involves unscrupulous directors ditching their debts or ‘ambulance chaser’ advisors deliberately targeting troubled companies with the promise of the seemingly magic bullet of a pre-pack.

In response to criticism the government beefed up the Statements of Insolvency Practice (SIP 16) rules which require IPs to be more transparent about the process in 2013. 

Last year, following a decade of lobbying by the BPIF and others, the government commissioned an investigation into pre-packs, by senior accountant Teresa Graham. The result was a series of recommendations, which included the Pre-Pack Pool (PPP). This is a voluntary assessment system, paid for, at cost of £800, by parties planning a pre-pack, which gives those parties a decision within 48 hours on how viable the proposal is. The decision, by one of 20 suitably qualified professionals, will be: ‘the pre-pack is not unreasonable’, ‘the case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided’ or ‘case for pre-pack not made’. 

The BPIF part-funded the set-up costs of the PPP and sits alongside 11 other trade and professional bodies overseeing it, although it would have preferred a change in the law. Graham says the reforms will “transform trust in pre-pack insolvency as a form of business rescue”. 

Missing the target

The announcement has been greeted with a fair degree of scepticism from people who think it’s aimed at the wrong people. 

Owner of £1m-turnover litho and digital printer Aston Colour Press William Martin said: “The worst pre-packs aren’t going to be interested. It’s the bad ones that are a problem so this is not going to address that problem.” He says pre-packs were “a double hit” for competitors. “I have to compete with the guys that are under cutting me and the paper costs more because paper merchants have to put their prices up to cover their costs.

“I’m 23 years in this business with the same limited company, I’ve never done any ducking and diving. The fact is, in this country you can drop your debt and run away. That should be a crime.”

Mark Nelson of Compass Business Finance also feels that unless the PPP is a legal requirement only people “who are above board” and know they will pass would use it.

“The ones with a potential question mark over their activities, are likely to avoid it completely,” he says.

So why choose a voluntary system at all? Graham is herself an advocate for less regulation, which was possibly a factor in her appointment by a government that has pledged to cut £10bn in red tape over the course of this parliament.

According to Martin the PPP could work if suppliers agree only to deal with pre-packs that use it.

“The biggest problem is that the paper merchant companies and also the finance companies deal with the pre-packed companies,” he says.

That is not the approach of the UK’s biggest paper supplier Antalis, says regional credit manager Andrew Barbaro.

“Antalis will not support any blatant attempt by previous shareholders and directors, to walk away from financial debts and obligations,” he says, adding that the company does recognise that receivers and admin-istrators have a legal obligation to sell the assets of failed businesses for the best value.

When this results in a pre-pack or phoenix sale, Barbaro says Antalis “will look stringently at the business plan and funding going forward before any support is offered, and that support will only be offered if the new main directors and shareholders are different and unrelated to those of the failed business”. 

He adds: “We will also take care to ensure that any asset sales have been conducted legally and ethically. We will continue to make our own judgements irrespective of any report from the Pre-Pack Pool.”

As a financier Nelson also thinks that companies that don’t apply to the PPP will “find it very difficult to gain any credit” in the future. 

“While this is hopefully good news, it does require that creditors would support a pre-pack business that has been through the system and gained a favourable review. Without this, there is no point any business making the application.

“Critical to the success of the pool, will be the 48-hour turnaround, as without this, faith will be lost very quickly,” he says.

Partner at national restructuring, turnaround and insolvency firm BM Advisory Andy Pear accepts that creditors often feel frustrated, but adds that responsible IPs were “very aware of creditors’ concerns regarding pre-packs particularly when it involves a sale to connected party”.

As well as the requirements under SIP 16, creditors can challenge the decisions of any administrator under The Insolvency Act, he says.

He concludes: “The hope is that the PPP will engender more trust in pre-packs as a restructuring tool when a connected party is involved, but it may be seen as a further layer of bureaucracy to the pre-pack process with additional cost.”