The Bridge that collapsed

THE RECENT COLLAPSE of Bridge Business Recovery came as a shock to the industry – that an insolvency firm would wind up in administration was unthought of. However, it wasn’t just Bridge’s demise that was shocking but the failure of its pre-pack – backed by the largest creditor.

In June, following the discovery of “significant irregularities”, the partners of Bridge Business Recovery (BBR) sought an insolvency process. The administrators felt a pre-pack offered the best option for creditors, as it would minimise redundancies and disruption to the business. However, a court would not give its seal of approval and BBR entered into administration.

What happened?

Colin Haig, lead insolvency practitioner, and Samantha Bewick, both from KPMG, were appointed joint-administrators on 1 July.

When called to the collapsed firm, Bewick and Haig set about trying to obtain the pre-pack administration.

As they did not have enough time and funding to market the business prior to it entering an insolvency process they wanted to obtain court approval.

“Attempting a pre-pack without sanction from the court would have been likely to attract negative comment,” said Haig.

The pre-pack proposal already had the backing of the largest creditor, HM Revenue & Customs, which was owed £1.3m, and the partners’ professional regulator ICAEW.

The plan was to sell the business to some BBR partners, which would ensure minimal redundancy and business continuity.

However, the judge sent Haig and Bewick packing as he felt it was only fair BBR was marketed properly before sanctioning a sale to the partners.

Unfortunately the administrators decided they could not fund BBR while seeking a buyer and entered it into administration.

Although no estimations were given on what a pre-pack would have returned, Haig said in the creditor meeting this week: “Essentially we are of the view the pre-pack would have achieved optimum value”.

Unsecured creditors are likely to receive less than 20p for every pound owed in the administration.

To pre-pack or not to pre-pack

The news of a failed pre-pack in the face of all the right backers has brought confusion to many insolvency practitioners, with some believing the judge and the court system might not have fully understood the positives of using this vital insolvency tool.

The stigma attached to the controversial insolvency procedure, with marketing taking place behind closed doors without creditor knowledge (in most cases), leaves a bitter taste for both the court and public perception.

In the BBR case, redundancies would have been kept to a minimum, the creditors would have likely received more money, and the administrators’ costs could have been less (as they would have needed to bill less time) if a pre-pack had taken place.

There are very successful pre-pack stories, such as music publisher and producer EMI’s pre-pack sale to its lender, Citigroup. In this case the company was valued at between £1.6bn and £2.3bn but owed its lender £3.3bn, essentially being insolvent.

There was no need to market the business as it was unlikely another buyer would pay over the odds for the company. The lender Citigroup reduced the debt to £1.2bn and made £300m in cash available to EMI – essentially saving the business from mass redundancies and severely damaging the brand if it were to enter administration.

The next step

The government has decided in future any pre-pack sale where a company is to be bought by a connected party, such as current managers or owners, notification must be given to creditors three days prior to the sale.

Although in theory this looks as though it creates further transparency into the procedure, it offers little time for creditors to protest a deal while slowing the rapid turnaround insolvency process.

The reform to pre-packs was due to be implemented across the profession before the end of the year. However, it has been delayed until April 2012 with many spectators believing this could be to revise it further.

If there is one thing the profession should take away from the lesson of BBR’s failed pre-pack and upcoming reforms, it is that insolvency practitioners must do more to explain the pros and cons about their decision in choosing a pre-pack – so judges and the public will no longer consider them an underhand tactic but instead a vital business continuity exercise.