At the request of Vince Cable’s business department, Teresa Graham carried out an independent review of pre-pack administrations, published in June 2014. The review was tasked with looking at the long-term impact of pre-packs, whether they provide best value to creditors as a whole, their usefulness in business rescue generally, the potential to cause detriment to particular groups of creditors and whether there are particular practices associated with pre-packs that cause harm.
In general the review concluded that pre-packs are a useful tool or preserving value in certain circumstances but that certain aspects of the process could be improved. Specifically, six recommendations are made:
- That a pool of independent experts known as the “Pool” be established and that connected parties approach the pool with details of the pre-pack deal for a member to opine on
- On a voluntary basis the connected party complete a viability review indicating how the new business will survive the first 12 months post the pre-pack and what it will do differently so as not to fail again
- That a new version of Statement of Insolvency Practice 16 (SIP 16) be adopted incorporating the recommendations of the Graham Report
- That marketing of a business before a pre-pack be improved with a wider reach for a longer period and with much greater disclosure of the marketing strategy
- Improvements to the disclosure of valuations and a requirement that valuers carry professional indemnity insurance
- That the monitoring if SIP 16 statements be moved from the Insolvency Service the various Recognised Professional Bodies.
You can download a copy of the full report here: https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration
BM&T welcomes the Graham report as a well thought through response to a number of public concerns about pre-packs. Recommendations 3, 5 and 6 are largely procedural and it is 1,2 and 4 that have the potential to change the way pre-packs are carried out.
We believe the pool is a good idea although its success will be dependent on the skills and experience of the pool members and on the quality of the information supplied to them.
The viability review is a welcome recommendation to force businesses to consider what they will do differently to avoid a repeat failure. It should also force businesses to consider their financing needs post a pre-pack when management is often surprised to find that trade credit is not as available as they expected and that HMRC may require deposits etc. Recognising that it will not be business as usual and what has to change is important for the ultimate survival of the business.
Lastly the marketing proposals are very welcome and should go a long way to improving transparency and ensuring that a fair price is obtained for the business.
We remain concerned that in a wider context, far too many businesses find themselves guided down the route of a formal insolvency process with little or no consideration being given to consensual alternatives that preserve greater value. Indeed, the Graham report alludes to the commoditisation of insolvency services in para 8.8 but concludes the issue is outside the scope of the review.
The devil will as ever be in the detail and it is to be hoped the reports recommendations are implemented in a positive fashion and in the spirit intended rather than being watered down wherever possible. Time will tell on that one but lets hope so.
David Bryan – Principal, BM&T
4th July 2014