In June 2014, Teresa Graham published her report into pre-packaged administrations and the way in which they were conducted. The report, commonly referred to as ‘The Graham Review’ acknowledged that the method of pre-packing a distressed business for sale does have a place within the UK insolvency regime.
However, the report made a number of recommendations and these recommendations were widely accepted. With the recent release of the new Statement of Insolvency Practice (SIP) 16, and the commencement of the operation of the Pre Pack Pool, the revised method of pre-packing is now open for business.
Bev Budsworth who heads up The Business Debt Advisor comments, “The pre-pack pool will mean that directors looking to buy back their businesses will need to make sure they can demonstrate they can trade the business viably going forward. This is a positive step as I have seen too many directors financially wiped out following the failure of yet another business. Frequently the phoenix business cannot raise finance and directors have to rely on personal credit to fund the 2nd business”.
This will also create additional work for accountants advising the directors as they will need a business plan and projections.
What is the Pre Pack Pool (PPP)?
The PPP is an independent body of experienced business professionals, which was set up in line with one of the key recommendations of The Graham Review. Directors, or other connected parties hoping to purchase a distressed business out of administration will now submit an application to the PPP. A pool member will then review the submission and offer an opinion on the proposed transaction.
Who are the Pool Members?
The Department for Business, Innovation and Skills (BIS) recently announced the names of the 20 individuals who have been selected to become pool members. All have been selected following a public recruitment process and on the basis of their experience and knowledge of UK business. A full list of the members can be viewed at www.prepackpool.co.uk/about-the-pool
How does it work?
Submissions to the PPP are made by prospective purchasers via a secure online portal. The submission will then be reviewed by any one pool member who will then issue one of three opinions:
That the pre-pack is not unreasonable
That the case for pre-pack is not unreasonable but there are minor limitations
That the case for pre-pack has not been made out
The cost of the submission is £800 + VAT and the PPP aims to provide a response within two business days from the date when the submission was made and the fee paid. There is no appeal mechanism and the pool members will stand in respect of that application.
What does this hope to achieve?
The Graham Review was commissioned as part of the Governments wider ‘Transparency and Trust’ agenda. It considered the full economic impact of the process and aimed to recommend reform which would promote rescue culture, with a greater balance of fairness to the stakeholders involved.
Research produced by the University of Wolverhampton showed that of the 497 companies reviewed (pre-packed between 1 January 2010 and 31 December 2010) 121 of new companies had failed within 36 months. As part of the new application process to the PPP, the connected party may choose to submit a ‘viability review’. This will state how the purchasing entity will survive for at least 12 months from the date of the transaction, and include a short narrative on what will be done differently.
Although not compulsory, it is encouraged and it is anticipated that this will promote greater success among successor companies.
For further information visit www.prepackpool.co.uk/questions-answers or contact a member of The Business Debt Advisor on 0333 9999 689.