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Pre-Packs an Open Approach

By Debbie Cockerton

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Debbie Cockerton highlights key recommendations in Teresa Graham’s recent report into Pre-Pack Administration, which if adopted will bring greater transparency to the process

Love them or hate them, there is constant debate on whether Pre-Pack Administrations are fair to the creditors.

The Graham Report, published in June 2014, is welcomed in the profession and goes a long way to expel some of the myths associated with pre-packs.

There has been a number of recommendations which aim to increase transparency, fairness and provides for creditors to achieve best value.

Graham has advised that pre-packs have a unique place in the insolvency market, but says there must be major changes in the way that they are administered. Graham believes that her proposals will lead to real improvements in pre-packs and she hopes that the insolvency industry and those in business will embrace the measures.

So what is a pre-pack and what is the Graham Report all about?

If a company is having problems, it may look to sell assets through an Insolvency Practitioner (IP). The sale is done behind closed doors and is often to the existing directors, soon after the administrator is officially in office. The sale need not be completed by open market sale.

Creditors first find out when the administrator presents them with a report, stating what the assets were sold for and advising them of likely dividend prospects.

The report states that the quality of marketing of the business in a pre-pack needs to improve and this may lead to a better return to the creditors and also improve confidence in pre-pack administrations.

Research carried out shows frequent use of desk-top valuations, and says that these valuations have been influenced by the value the purchaser is prepared to pay, rather than by applying the true market value of the assets in question.

Graham recommends that valuations must be carried out by a valuer who holds professional indemnity insurance, and a detailed explanation of the valuation should be provided. The report also recommends that directors should take more responsibility about the ongoing viability of the new company, and that there should be an independent scrutiny of the deal, before the event, by a panel of “experienced experts” before the sale goes ahead.

This would mean that the focus of the sale would also be aimed at the directors, rather than just the IP, and the report turns the spotlight on the directors involved in a connected party pre-pack.

Transparency is vital if people are to believe that the sale of the business is the best possible deal, and why. If pre-pack administrations are carried out properly, they allow for the viable parts of a business to continue; jobs are saved, costs are reduced and a benefit is provided to creditors. If the staff were made redundant preferential claims would increase, resulting in less monies being available to the non-preferential creditors.

We will need to see if the Graham Report recommendations are accepted. If so, they will lead to greater transparency and increased confidence in pre-pack administrations.

Published October 2014