UK Pre-packed lunch
By Maria Pombo, BeRescued and EACTP Finance Director
When the email from my barrister arrived in my inbox titled Pre-packed Lunch, the first thing I thought “well let’s see what’s the gossip now in the tainted world of pre-packs!”… to my pleasant surprise the gossip was the enactment of a new statutory instrument (The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021) that in short allows connected parties (directors, shadow directors, non-employee associates and their connected companies) to obtain a written qualifying report by an evaluator to submit it to the administrator for his consideration in order to buy back the company within a period of 8 weeks of entering an Administration process. I would let you read the rest of the article here.
I was delighted with the news for two reasons:
- this instrument is super helpful to Directors that may have lost control of their company via an Administration order sought by a creditor or a group of creditors and wish to rescue the business by tabling an offer soon after the order becomes effective and
- the Evaluator is an independent to the connected person professional that must consider himself/herself to have the relevant knowledge and experience to make the report. The evaluator is required to have professional indemnity insurance against liabilities to the administrator, the connected person and creditors. And so this is where I strongly believe a Certified Turnaround Professional would have a role in bridging the connected persons offer and Office holders duties because of our understanding of the nature and value of what may be (or not) commercially fair consideration and therefore our ability to prepare in evidence a qualifying report.
Of course there are rogue Directors that have used and abused the pre-pack arrangements to leave creditors and employees in the lurch, but luckily my experience of working with Directors and small business owners in particularly have been that they do really care about their business, not because it’s their way to make a living but is their way of life. And there is a strong case for Directors, as I recant my case study later on, to utilise this tool to salvage as quickly as possible their business when under Administration (as sometimes time is against those who seek to challenge an Administration order in court)
MY CASE STUDY
A few years ago I had a case (a small family run biodiesel and waste recycling company) that unfortunately for the directors, they suddenly lost control very quickly of their business (for what in my opinion I still consider a case of abuse of power by Senior Creditors) literally overnight.
It all started because the company was sold a rather convoluted factoring agreement (with a PPI) and mis-sold a hedge collar mortgage product by the same relationship manager that worked in one bank and moved to the other bank, the banks then syndicated via a deed of priority. The directors owners not only decided to change factoring agreement but made a claim against the bank, plus they also wanted to sell their business, which intention was rather naively disclosed to the banks. The relationship soured and there were allegations made against the company for breach of covenant in the factoring agreement (I still believe the syndicate banks did not like the claim) and forced a business review.
Because of the deed of priority the covenants were so restrictive one of the banks called up the factoring debt, talked to each other and within 48 hours they had the same firm that conducted the business review were appointed as Administrators. My engagement came as the Administrators literally changed the locks to the factory!
The directors wanted their business back and since they had good long term relationship with their customers and suppliers, they acted quickly and talked to them to see if they would support a new business design if the Directors were to buy the business back in a pre-pack. Once we had their ok we came up with a ~£70k offer to buy the plant & machinery, a CVA proposal plus leasing the site, this offer was made to the Administrator which was tabled by them to the Creditors with a note that it was not viable and a better price could be made which subsequently proved wrong.
No parties came forward, the administration was extended to almost a year and a half, the plant had to be broken up and sadly nothing was left of the business!
I strongly believe that if this instrument would have been available at the time the Director’s chances of saving their business would have been much greater because the offer the directors made at the beginning of the administration in the longer term was better than market value and an independent qualifying report would have confirmed this.
WHY CTP’s
The way I see this as a broader opportunity in terms of a successful turnaround of a business in an insolvency process is that for an earlier engagement by the connected parties of a Turnaround Practitioner to assist in the rescue of the business on either an advisory or CRO role. Of course if a Turnaround Practitioner acts as an evaluator for the purpose of the qualifying report it would not be able nor appropriate for him/her to be involved in a turnaround process as they would be in conflict but an early educational and informative approach of what options are available to directors and connected parties will guide them to seek an alternative Turnaround Practitioner to assist them with the business pre-offer proposal and/or post transaction.
This is a new piece of legislation that has opened a new opportunity to work either independently as an evaluator or closely with IPs. I am exploring with my insolvency compliance specialist colleague the possibility to work together in a workshop to create a framework for what the qualifying report should look like from a Turnaround point of view and so I would very much welcome the view of my CTP’s colleagues on this approach.
Share this page: