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Thursday, 9 April 2009

Pre-pack Administration "stiffing creditors"?

In discussing a pre-pack administration of Trust-Est Ltd (a wealth management company) City Diary in the Daily Telegraph today used a term that is gaining momentum.

Extract from City Diary 9th April 2009:

"Banking on pre-pack administration

An interesting take on pre-pack administrations, the method by which directors can put their businesses into administration, buy back the bits they want, and leave creditors to whistle.
Wealth management company Tru-Est ran into a spot of bother with its own wealth earlier this year. A quick restructuring and most of the business emerged as PAM Insight. On the way creditors lost roughly £700,000, including, as ever, the taxman, down by £250,000.
Still, management stayed on and the company's banker, Coutts (which you will remember is owned by state-controlled RBS) also got paid off and is now the new company's banker.

The taxpayer gets stiffed and the banks do quite nicely. Where have I heard that before"?

Recessions always lead to a rise business failures and also lead to more awareness of the insolvency techniques in the media. Frankly many lazy journalists DO need to learn more about insolvency techniques to reduce the erroneous labels they use like "creditors voluntary agreement" instead of company voluntary arrangement, or using "receivership" to mean all things corporate insolvency wise. So hopefully journalists will do some research before attacking all insolvencies as a stitch up.

So, back to my thread! In this little Telegraph article there are many stereotypes, insolvency is dirty, stiffing creditors, banks stitching up creditors, taxman left with big debts. Inevitably more and more media people are going to jump on this bandwagon and sooner or later it will be turnaround and insolvency practitioners who get the blame!

Of course pre-pack administration is going to lead to losses for unsecured creditors, that happens in receiverships, liquidations and administrations every day of the working week. Whats different about a pre-pack and a phoenix out of liquidation?

I think the silent nature of the process until it is essentially completed is the key difference. In pre-packs most of the work is done before the creditors are made aware and presented with a fait accompli. In liquidation or administration, creditors are told there is a formal appointment and that its likely that there recovery will be modest to zero. Thus they are aware of the crisis.

The pre-pack tool is going to come under strenuous examination by HMRC, creditors, journalists and banks in the deepening recession ahead. With insolvency a lagging indicator, if you like, a sharp rise in pre-packs alongside all other insolvencies, will inevitably end in calls for a revamp of the legislation. These should be resisted.

My view is that there needs to be more consistency. At a recent meeting with RBS Specialised Lending Services team I was told, "Mr Steven if you are here to propose a pre-pack administration based upon selling the business assets to the directors then this will be a very short meeting indeed. The bank will not support a pre pack to the incumbent directors". As it happens we were leading a company voluntary arrangement restructuring for our client.

Is it me or is the above article a sign of double standards in the bank's approach?

How come Tru-Est was able to be pre-packed to the same directors by Coutts (a RBS bank)?

With new guidelines for practitioners (statement of insolvency practice or SIP 16) introduced last January the insolvency world is working towards better, more transparent standards. Shouldn't the banks also produce a statement of practice saying one way or the other whether pre-packs to the existing directors are to be banned or allowed?

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