Graham Review into Pre-pack Administrations
On 16th June the government published the report by Tessa Graham CBE on her recent review of pre-pack administrations which was commissioned by Vince Cable.
Pre-packs happen when administrators of a failing company conclude a sale of its business and assets to a buyer immediately after their appointment, with the transaction having been teed up in the weeks beforehand. In many cases the sale is back to a connected party (usually a new company with the same directors/shareholders as the insolvent company). Justification for the secrecy surrounding pre-packs is that it is the best way of ensuring that value in the business is preserved with employee and supplier support protected. The public perception has often been that pre-packs represent somewhat of a "stitch-up" to creditors who do not hear about the sale until after it has been concluded. Despite the introduction of a statement of insolvency practice (SIP16) in 2009 which set out the principles and procedures to be followed by administrators dealing with pre-packs (and subsequent revisions to it), there have remained concerns about the lack of transparency of such deals.
Tessa Graham has concluded that legislative change is not the solution and she promotes de-regulation in this area. Her team's research showed that the large majority of pre-packs were of SME's and the review dispels certain negative preconceptions around pre-packs. Her report makes the following key recommendations:
- Where the pre-pack sale is to a connected party, they must disclose the deal's outline to a "pre-pack pool" to promote independent scrutiny of the transaction but retain secrecy.
- The connected party transacting on a "pre-pack" must complete a viability review on the new entity taking forward the business, which will be disclosed with the SIP16 statement to creditors after completion.
- A redrafted SIP16 report to be introduced to include modifications to marketing and valuation guidelines.
- Revisions to the marketing strategy by administrators with an improvement in quality and methods of reporting (even where no marketing of the business is undertaken).
- Valuations to be carried out only by valuers with professional indemnity insurance.
- SIP16 statements are to be monitored by the administrators' regulatory bodies not the Insolvency Service.
The de-regulation of pre-packs will mainly be welcomed by insolvency practitioners however, most will be keen to see the government's full response to and development of Graham's recommendations.
Please see link to the report and review paper for further information.