When Polestar collapsed last year it gained notoriety for a number of reasons, but one that may have slipped under the radar was that it became the only pre-pack of 2016 by a connected party (in Polestar’s case, Swedish private equity fund Proventus Capital Partners) referred to and approved by the newly formed Pre Pack Pool [see boxout] that went on to become insolvent.
This rather alarming outlier was a kick in the teeth for a voluntary regulator still very much in its infancy and, as a result, the BPIF, which sits on the Pool’s board, immediately set about reviewing its involvement.
But Polestar was an extreme example of what is not necessarily always a bad practice, after all a pre-pack doesn’t automatically involve a business’s previous owners, it’s simply a description of a situation where a sale of company is agreed in advance of insolvency, but where the sale actually hinges on the company being placed in administration, even if it’s just for a matter of minutes or hours.
In many instances, this can be done with the best intentions; in order to protect jobs, reduce the risk of the business losing clients and, as a result, being unsalvageable – all, in theory at least, in the hope of recouping the greatest value for creditors of the ‘old’ business.
However, all too often it’s the ‘bad’ pre-packs that make the headlines, and, understandably, generate the ire of the print industry and beyond.
A 2014 review, led by accountant Teresa Graham, set out to change this dodgy pre-pack world-view. While incidences of pre-packs are falling (there were 769 in 2010 compared to 371 in the 14-month period covered by the Pool’s report), Graham believed greater transparency was required.
Her review concluded that there was a place for pre-packs in the UK’s insolvency landscape and that the benefits can be worthwhile.
“When Teresa Graham’s report came out and illustrated there were such things as good pre-packs and they were good for the economy and business, I became a bit of a convert,” says Stuart Hopewell, one of two directors who voluntarily heads up the Pre Pack Pool.
“I represented the original committee on the original staffing group and gradually thought over time there is some mileage in allowing this system to continue.”
However, for some, the Pool’s inaugural report, issued last month, made for depressing reading. Of the 188 connected party pre-packs that took place between 1 November 2015 and 31 December 2016, just 28% (53) were referred to the Pool; 34 were given the green light, 13 amber and six were dealt a red card – although it’s important to note that the Pre Pack panel has no regulatory powers to block a pre-pack sale.
Oliver Parry, head of corporate governance at the Institute of Directors, who sits on the Pool’s Oversight Group, believes the panel requires a bit more bedding-in time.
“In 12 months the stats will be totally different to what they are now. The Pool is there to provide advice, they have experts on hand, the secretary that runs it is effective and the systems and structures are in place.”
Print pre-packs
Pinstripe Print’s Nigel Lyon is the BPIF’s representative on the Oversight Group and was more disappointed than Parry in what he termed a “fairly low” referral rate. Lyon points to creditor apathy as an issue, along with potential misgivings surrounding the £800 fee.
Former Fujifilm credit manager Hopewell agrees and considers that in his experience, creditors need to be encouraged to put more pressure on potential buyers to refer their purchase to the panel.
While creditors can’t themselves report companies to the Pool, its directors, which also includes property insolvency expert Duncan Grubb, want to use publicity to convince creditors that leaning on connected parties to utilise the Pool is in their best interests.
While the pool has a relatively high profile in print, thanks in part to Polestar, Hopewell says that pre-packs are just as common in other business sectors and while many in print believe it is more blighted than most, it’s simply not the case.
However, Ian Carrotte, chief executive at credit specialist ICSM disagrees, seeing the asset-heavy print industry as one that is highly susceptible to “dodgy” pre-packs.
“There is a scepticism in print borne of the pressure that it is under from tight margins,” says Carrotte.
“The competition between printers is intense because of the way things are and I think that engenders suspicion, rightly so in some cases. Some out there use tactics to cheat, basically.”
Lyon also accepts that print has historically been rather pre-pack heavy, but believes cases are dropping as suppliers wise up to the practice.
“Paper companies used to think if they dealt with someone who historically went through a pre-pack, they would deal with them again. Now they would turn around and might say ‘I’m sorry we are not dealing with you’,” he says.
However, it could be an uphill struggle convincing creditors and the wider public that pre-packs can be beneficial. A recent Financial Times investigation into the impact of pre-packs on pensions found that companies in the UK have used pre-packs, most often to connected parties, to offload £3.8bn of pension liabilities. But that particular stable door might be about to close before any more horses bolt. Earlier this month, the pre-pack sale of 350-staff Pulse Flexible Packaging was blocked by the trustees of its pension fund after a potential buyer drew up plans to dump its obligations.
Elsewhere, the Federation of Small Businesses policy advisor Richard Hyde says that even the most transparent of pre-packs will have to come on leaps and bounds before SMEs are able to place faith in the practice.
Hyde says: “The message from our members is that they [pre-packs] weren’t always being used honestly for genuine business recovery and it was more of a way of avoiding essentially returning assets to creditors, which was another example of how elements of the insolvency system seem to mean that small, unsecured creditors tend to get nothing or very little from insolvencies.”
But the Pool will not roll over yet. Now it is up to former pre-pack sceptic Hopewell to continue to use its transparency to convince the many doubters.
Pre Pack Pool explained
The Pre Pack Pool was set up to follow through with one of six recommendations issued by accountant Teresa Graham in her 2014 review of pre-pack practice.
It is an all-voluntary service, set up as a limited company (Pre Pack Pool Ltd), headed up by Stuart Hopewell and Duncan Grubb.
Connected parties interested in pre-packing can refer their case to the Pool for an £800 fee and will receive a response from one of 20 experienced business professionals from a range of sectors within 48 hours (Polestar was one of the few to go over the time limit).
There are three possible responses issued: ‘the case for the pre-pack is not unreasonable’, ‘not unreasonable but limited evidence’ or ‘case for the pre-pack is not made’. The Pool can only advise and has no power to halt pre-packs.
An Oversight Group meets once a quarter and includes representatives from the BPIF, the Institute of Directors and the Insolvency Service.
OPINION
There’s plenty of room for improvement at the Pool
Charles Jarrold, chief executive, BPIF
Pre-pack administrations are by nature controversial and are usually unpopular. There’s an intrinsic sense of unfairness in seeing a competitor appear to slough off debts and carry on, especially where the pre-pack is to a “connected party”. Pre-packs have been a particular concern in the print industry, partly due to its capital intensive nature.
Teresa Graham concluded that pre-packs can play an important role in the UK’s insolvency framework, but there needed to be improvement in how they were administered. Six recommendations were made, including the creation of the Pre Pack Pool, which provides a desktop review of the most controversial connected party pre-pack sales.
The Pre Pack Pool has just released its annual review, covering the period since creation on 1 November 2015 through to December 2016, and it makes for interesting reading. Administration appointments have fallen by 72% since their peak in 2008, and compared to the two years 2010 and 2011, when numbers were tracked, pre-packs halved to 371 in 2016, with connected party pre-packs representing just over half of these (51%), down from over 70%. It looks like the focus is having an impact.
What is clear to us, however, is that there’s still a great deal of room for improvement in the Pool uptake. Just 28% of connected party pre-packs went to pool review, with one of those, Polestar, failing conspicuously in short order. Room for improvement indeed, so we will continue to engage in the debate, seeking to ensure that the insolvency framework strikes the right balance – sometimes organisations need to fail and close rather than be recycled.
In the meantime, we’ll be closely involved in looking at how pre-pack administrations affect our sector, at the extent of implementation of the Graham Report recommendations, and we’d strongly recommend that creditor organisations consider their role in ensuring Pool review becomes the norm, not the exception.
READER REACTION
Do you think pre-pa cking can ever be a good practice?
William Martin, managing director, Aston Colour Press
“It can’t possibly be good practice and can never be justified – it’s theft. If a company goes bust, it has gone bust for a reason, and every time another one pre-packs everyone along the supply chain, including me, has to pay for that incompetence while they get away with it. Some people say pre-packs are good because they save jobs, but those jobs were never there in the first place – they were artificial jobs in an industry that suffers huge overcapacity. Pre-packs are dreadful.”
Martin Lett Jr, sales and marketing director, Marstan Press
“They have never worked and probably never will. Only today I heard of a business trying to be sold which itself was a pre-pack this time last year. They serve only to push back the inevitable a few months. I’m not aware of a successful pre-pack though I did know of one that first pre-packed about 10 years ago, then phoenixed again in 2015 and dumped its debt to continue. Pre-packs shaft the suppliers and damage everyone else in the industry. Paper merchants are switching on, probably because they’ve been stung so many times.”
Rob Kelly, managing director, Displayways
“The fact that administrators are able to sell a company’s assets immediately upon appointment, without the approval of the majority of creditors, is where the problem lies. Sometimes these deals include payments to the former management that then leaves little for the creditors and the bad feeling then arises. However, if businesses have failed for unforeseen circumstances, the pre-pack can be used as a restructuring and recovery tool that continues to employ people. In this regard it can be a good result.”
