Clunky proposals won't help creditors or stop phoenixing

Kevin Lucas
Wednesday, April 13, 2011

I am certain the government's new proposals will go some way to quell growing unrest about pre-packs, but am concerned the practical outcome will be 'phoenixing' in a different form and a reduction in returns to creditors. Some of the proposed measures appear badly thought out when we should be focusing on returns to creditors, not the apparent emotional displeasure of entrepreneurs being allowed a second chance.

The proposals are likely to push more companies into liquidation, which could actually be more beneficial for connected parties than a pre-pack and will not stop the ability to ‘phoenix’. It could also push directors to dispose of a business to a connected party prior to instructing an IP to wind up the shell that is left – a practice which is not very common at the moment but entirely feasible and potentially unchallengeable – a ‘pack-pre’ if you like.

One concern I have is over the proposed requirement to provide notice to so many people before the event. This will result in confidentiality being lost, affecting the business’s ability to trade and potentially constraining it to an early death. And if the plan is for this knowledge to allow others to make a bid, three days is insufficient time to make an assessment and realistic offer. The reality, especially with SMEs, is there are very few genuine purchasers of insolvent businesses, less so after the Feb 11 ruling that TUPE rules will now apply to all companies in administration, meaning a connected party sale is often the only real option.

I welcome creditors having more input, but that input should be limited to matters where they can exercise judgement, not where specialist knowledge about insolvency processes is required. Having the ability to make court applications or assessing if a deal is fair cannot be done effectively without detailed knowledge of the facts, risks and potential outcomes. We are licensed and regulated to deal with these often complex situations but creditors are not, yet they are almost being given the opportunity to make the decision instead of us – this just seems imprudent.

These proposals are disappointing for creditors; I suspect the vast majority of those who do not pre-pack will go into liquidation, reducing the commercial outcome, but this concern is clearly not the driving force behind the announcement.
When an administrator is appointed, a decision needs to be made quickly on whether the business can be traded on: will it make a profit, can a buyer be found, is there funding, can we get supplies, can we retain customers and key staff?

Unfortunately in most administrations, not enough of these answers are positive and the alternative then is to close the business almost immediately, make the staff redundant and conduct an auction of its assets – this sounds very much like liquidation, where it has been proved returns to creditors are lower.

The best way, therefore, to conduct this process is to ask these questions before the administration and, in order to maintain value, do it confidentially – this doesn’t mean nobody knows; it means it isn’t made public. The proposals torpedo this principle – good news for creditors most say – but the commercial reality is unlikely to live up to this.

Kevin Lucas is partner at insolvency practitioner BCR

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