The Pre Pack Pool – problem-prone and pointless?
Business Recovery & Reconstruction E-alert: News & view from the bridge
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. It came about 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 to applications on 2 November 2015, however, there have been just five applications to it since, one of which was submitted by Suzanne Jones, in the Business Recovery and Reconstruction team at Howard Kennedy.
In this post, Suzanne Jones provides her experience and opinions on the process and ultimately whether she thinks it achieves the objective it set out to. She also makes some interesting suggestions about how the industry should change the perception of pre-pack sales.
The PPP – the application process
An application to the PPP is entirely voluntary and costs £800 plus VAT for an opinion which is 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.
I recently submitted an application and my view is that it is time-consuming, costly and serves no purpose. Generally speaking, when acting for a proposed administrator or purchaser there is always very limited time to complete the pre-pack sale and the application to the PPP is just something else that now needs to be dealt with in the very limited time available. Regarding the application form, I had many difficulties completing it, although when I did contact the PPP I did receive helpful assistance.
I intended to print out a copy of the PPP application form to review and make sure that I was in possession of all information before I started to complete it. Here was the first difficulty. It is not possible to print out the whole form as you must complete one page before you can move onto the next. Sounds like it shouldn’t be a problem but once you start the application you only have 24 hours to submit it before it is deleted.
I found a page headed ‘Guidance Documents’ and collated most of the information listed on this page saving it into PDF and word documents. I did not have a valuation, but that is not unusual. I was ready to submit the application and I was faced with another difficulty: I was unable to upload the PDF documents. Finally, I managed to submit the application and a few days later my client received the opinion in his spam mail folder!!
My greatest concern was that the reviewer would conclude that: ‘There is a lack of evidence to support a statement that the grounds for the proposed pre-packaged sale are reasonable’ because I could not provide details of the valuation. In answer to their request for details of a valuation I simply stated: ‘We note that you have requested a valuation however we are not permitted to have sight of the valuation obtained by the proposed administrators’. Of course, a proposed purchaser assesses what they believe to be the value and that is reflected in the offer they make. There are a number of ways they do this, including considering the book value, but they also consider what third parties are likely to offer for the business and assets. However, a proposed purchaser would not be provided with the independent valuation obtained by the proposed administrator.
In my view, it is the independent valuation that is crucial to be able to assess whether a proposed transaction is reasonable. It seems absurd that they can conclude a sale is reasonable without this information. The reviewer did make 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.’
The PPP – a chocolate teapot?
Personally, I do not think the PPP serves any useful purpose at all. The perception of pre-pack sales will not improve by the proposed purchaser obtaining such a vague opinion from the PPP. Furthermore, it is highly unlikely a PPP reviewer will ever receive details of a valuation and in my view this is crucial information to be able to assess the reasonableness of the proposed transaction.
The application is voluntary and there is no obligation to show the opinion to the proposed administrators nor is there anything to encourage a proposed purchaser to submit an application. I also fail to see how a proposed administrator, or lawyer, would persuade a proposed purchaser to submit an application. If a client ever questions why an application should be submitted, sadly there is no answer other than it is industry practice.
If Insolvency Practitioners (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 PPP will not prevent this. The criticism should not be of pre-pack sales but of the regulators for failing to sanction those involved in deals that do not achieve the best result for the creditors.
The small number of applications to the PPP since its creation suggests that a number of proposed purchasers are not making applications and I can only make assumptions as to why. I suspect that:
- They form the acquiring company so that they do not fall within the definition of connected
- They sell the business and assets pre-liquidation
- They interpret ‘pre-pack sale’ as they wish, for there is no statutory definition. How soon after appointment does the sale need to complete for it to be a pre-pack sale? 1 hour? 24 hours? 3 days?
It is pretty easy for a proposed purchaser to justify why they did not submit an application, not that they would ever have to answer to anyone.
If IPs and purchasers are completing sales in circumstances that are not in the best interest of the creditors, then they are not going to be deterred from such practices by the introduction of the PPP.
Pre-pack sales – changing the public’s perception
It was Vince Cable, the former Secretary of State for Business Innovation and Skills who commissioned the report into the pre-pack sales in administration procedures and recommendations for reform as part of the Government’s wider ‘Transparency and Trust’ agenda. It seems that he commissioned the report because he believed that the law and regulation governing pre-pack sales needed reform to remove the negative perception of pre-pack sales. For the reasons set out in this blog I do not believe that his objective has been achieved through the creation of the PPP.
What should the industry do?
We ought to be replying to the allegations made by the media and we need to explain the alternatives to a pre-pack sale. 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 need to report. They need to have 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 see the reason 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. 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.
Sadly, I do not believe that the PPP has achieved what it was created to do, nor do I think it 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 sales will ever improve is by explaining why pre-packs are in the best interest of all stakeholders.