Pre-packs face scrutiny and calls for more transparency

Could a new-found appetite for transparency among creditors be about to transform the way pre-pack administrations are undertaken?

That’s the forecast from experts, who predict that more creditors could engage a set of insolvency professionals to review the work of the practitioners that have undertaken a pre-pack.

The views emerged following the case of Clydesdale Financial Services against accountants Smailes.

Clydesdale was a creditor of solicitors practice Alexander Samuel. The solicitors got into financial difficulty and a pre-pack sale of the business’ work in progress ­to the tune of £1.9m­ was arranged by an insolvency practitioner from Smailes.

Creditors of the solicitors, including Clydesdale, were only informed of the pre-pack minutes before the deal was struck.

Clydesdale and two other creditors applied through the courts to name a replacement administrator, who would conduct a review of the pre-pack.

The court removed the practitioner on the basis of the potential undervaluing of the assets and the failure to consult creditors before the sale was agreed, but emphasised there was not a stain on the integrity of the IP.

Although this course of action is nothing new, many experts believe it could gain momentum as growing corporate collapses increasingly infuriate creditors.

The latest case “might encourage creditors to do this more often” a spokesman for the Insolvency Service said.

“There is a drive towards scrutiny,” added Louise Brittain, partner in reorganisation at Deloitte. She said creditors, particularly HMRC, were challenging insolvency practitioner fees more often, which would result in these types of cases becoming “less unusual”.

The introduction of SIP 16 guidance notes by the Insolvency Service earlier this year, which meant IPs would have to compile reports on how they arranged the sale of the company and valued it, had been welcomed by creditors.

However, PricewaterhouseCoopers’ turnaround directors panel believes more still needs to be done to increase clarity in the process.

In its latest report, out this week, many feel the process of pre-packs is “morally questionable” and that some cases are “unacceptable”.

The European Commission has requested all member states review their insolvency practices by 2012. The Insolvency Service has already begun a “suggestions” consultation on the profession which closes at the end of the month.

IN OUR VIEW

Pre-packs have a bad name but they are often the best way for creditors to receive the highest returns on debt, and save jobs. If reviews increase and show IPs in a better light, creditors will have more confidence in pre-packs and question them less.

CUTTING THROUGH THE FROTH

Cobra Beer creditors lost £70m in the pre-pack sale of the company in May this year. Molson Coors became majority shareholders after settling £14m in debts. Founder and owner of Cobra beer, Karan Bilimoria, tried to sell the company for £200m last year. Source: Press reports

There were 89 pre-packs in April 2009. 88% of jobs at firms rescued through the use of pre-pack administrations were saved in April 2009 – compared to 60% of jobs saved through the use of other types of administrations.

Why a pre-pack could be the best option, in order of highest response:

1 Sale needed to be fast.

2 Best chance of saving the workforce.

3 Only alternative to liquidation.

Source: R3 survey