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Insolvency Series: The Phoenix Rises?

11 April, 2018Keith Pond

In our day to day lives we are often happy to buy goods that are “pre-packed” rather than in their basic state.  Chopped vegetables or ready-meals are prime examples. We tend not to ask what the detailed ingredients are but are happy with the outcome and with the convenience the product offers.

Not so with Insolvency.

Pre-Pack insolvency deals, often using the streamlined administration procedure under the UK Insolvency Act 1986 are treated with great suspicion, their ingredients pored over and their objectives and outcomes questioned.  They give benefits of convenience and, often, lower costs, but a faint tinge of the Phoenix still overshadows their deployment.



 

PICTURE BY VECTOROLIE AT FREEDIGITALPHOTOS.NET

In the “bad old days” of unlicensed liquidators (pre-1986) it was possible for company directors to form a new company and to buy the assets of their failed enterprise (at fire sale prices) and continue their business free of the old debt in pretty much the same premises, with the same assets, rising from the ashes with a slightly changed name.  Phoenix Services Limited became Phoenix Services (1980) Limited.

Where this was done fraudulently, creditors had every right to complain.

Instances of “Phoenixism” have always been suspected as the lack of information and the apparent nepotism irk the creditor body.

But rather than eradicate the tinge of “Phoenixism” The Insolvency Act 1986 (as amended) has generated a new type of process: The Pre-Pack Administration.

In a Pre-Pack it is possible for company directors to form a new company and to buy the assets of their failed enterprise (at fire sale prices) and continue their business free of the old debt in pretty much the same premises, with the same assets, rising from the ashes with a slightly changed name.  Phoenix Services Limited can become Phoenix Services (2018) Limited.

Yep - exactly the same outcome...

However, creditor frustration has been answered by two key reports into Pre-Packs by Nottingham University’s Sandra Frisby (2007) and Teresa Graham (2014).  Neither report found large-scale misuse of Pre-Packs and acknowledged that Pre-Packs often offered the best available outcome for creditors.  Cases where Pre-Packs would constitute the best outcome include:

  • Cases where Goodwill would be dissipated in an asset-based liquidation.
  • Cases where the existing Managers and owners remain the people who can get best value from the assets.
  • Cases where there is no other market for the business or its assets.

In addition, Pre-Packs do preserve business activity, jobs and economic activity and are often cheaper than “upstream” procedures (Graham, 2014).  The survival of business activity also has positive implications for future suppliers and customers.

In response to real concerns about a lack of transparency and valuation methodology, however, R3, The Association of Business Recovery Professionals, published a protocol, known as SIP16 (R3, 2015) that sets out the minimum standards and expectations of any Insolvency Practitioner proposing a Pre-Pack Administration.  All Pre-Packs should be SIP16 compliant in the future, hopefully giving confidence to creditors.

Lenders and creditors still need to ask questions and make their own judgements about continuing to trade with the “new” entity created, but all evidence points to the conclusion that Pre-Packs and “Phoenixism” are very different animals.

 

REFERENCES:

Frisby, S, (2007), Interim Report to The Insolvency Service on returns to creditors from pre - and post-Enterprise Act insolvency procedures, The Insolvency Service, July.

Graham T, (2014), Graham Review into Pre-pack Administration, Available at https://www.gov.uk/government/publications/graham-review-into-pre-pack-administration.

R3, (2015), Statement of Insolvency Practice 16: Pre-Packaged Sales in Administration, Available at: https://www.r3.org.uk/media/documents/technical_library/SIPS/SIP%2016%20Version%203%20Nov%202015.pdf