Pre-packs emerged in the UK after the introduction of the Enterprise Act 2002. They are governed by common law and a regulatory guide in the UK.
Prepacks save Jobs
UK Government Research into prepacks suggests the following:
|Particulars||Prepack sale||Insolvency sale|
|All employees transferred to new company||92%||65%|
|Secured creditor return||42%||28%|
|Average return (unsecured creditors)||1%||3%|
|Sale of assets to related party||59%||52%|
The 2014 UK Government Report into prepacks analysed a sample of 500 prepacks and found there was anecdotal evidence suggesting they were very good at preserving employment (page 26).
The Insolvency Service (the UK’s equivalent of AFSA) has stated:
“A pre-pack may offer the best chance for a business to be rescued, preserve goodwill and employment, maximise realisations and generally speed up the insolvency proces.”
It must be said, the use of prepacks in the UK remains contentious with various Government enquires undertaking an assessment of their benefit.
Links to UK Government reports on the operation of SIP 16 are here
The enquiries have noted problems with prepacks but concluded they are cheaper than the alternative formal administrations, they save jobs and overall it’s better to have a prepack framework rather than abandon it.
SME Market cannot afford to use VA
ASIC statistics show that of the 10,000 companies that enter into formal insolvency administration each year, less than 5% will use the voluntary administration framework to save their business.
ARITA research shows small deed of company arrangement costs $60K in fees and the company will pay another $90K to creditors.
This data suggests voluntary administration is simply too expensive to help small business owners.
I suggest prepacks will be 25% to 50% cheaper than a voluntary administration or liquidation.
The costs savings are realised by avoiding the professional fees to trade on an insolvent business and undertake a time intensive rapid sale of the assets. These tasks are undertaken by the director, under the guidance of the liquidator, at a fraction of the cost, prior to their formal appointment.
Productivity Commission Report
In its 2015 report, the Productivity Commission agreed with our submission that ASIC should issue a regulatory guide on the topic. The Productivity Commission stated:
“ASIC should publish a Regulatory Guide targeted at small businesses. A significant component of that guide should be directed at providing small business with a simple list of steps to follow in order to sell their business through a liquidator. This component should be modelled on the UK SIP 16. The production of such a guide will direct small businesses into the proper processes, improving overall compliance at a low cost.” (page 393)</Focus IZALCO MAX Disc ETAP 2>
“The guide should cover legitimate restructure and liquidation options and responsibilities, with a focus on the new processes designed to assist small businesses.”
To date, ASIC has declined to adopt the Productivity Commission recommendation. I feel they will need to be invited to act by the Minister.
What’s the Federal Governments Position?
The Federal Governments response to the Productivity Commission stated:
“The Government notes the UK’s non-legislative ‘pre-pack’ administration has attracted considerable criticism because of perceptions that it may facilitate fraudulent phoenix activity.”
“The Government notes recommendation [15.7], but acknowledges that it is directed towards the Australian Securities and Investments Commission (ASIC) rather than the Government. The Government notes that the ASIC is committed to updating its regulatory guidance when significant changes to the law are progressed.
However, I was fortunate to take part in a meeting with Senator Williams and Minister O’Dwyer to discuss prepacks and insolvency reform.
I was encouraged to learn the Minister was interested in prepack reform; however, the Minister’s office wanted to see industry support of the concept before further consideration.
In my discussions with the Shadow Minister’s office, it became clear industry support is vital when they come to consider their policy.
The endorsement of liquidators who practice in the SME market is therefore very important if the Minister or Shadow Minister are to encourage ASIC to issue a Regulatory Guide.
Where is ARITA on this topic?
I will write to the ARITA board members and invite them to consider Mr Fisher’s framework and clarify their position with respect to prepacks.
I’m hopeful ARITA will support the concept and collaborate with the AIIP on this project.
Is one Liquidator better than two?
It appears ARITA supports a restructure model that uses 2 liquidators to sell a small business. Their framework is called pre-position sale.
One liquidator would do the pre-appointment sale and a second liquidator would review the sale.
In its submission to the Productivity Commission, ARITA stated their model works as follows:
“The pre-positioning work is done prior to a statutory insolvency appointment, with directors taking advantage of the safe harbour protections… to undertake an orderly wind down of the company’s operations – that is a well-managed process where assets may be realised for market value in a non -distressed sale – prior to making a formal insolvency appointment.”
I think it’s a great model for large companies to use.
I was surprised the Federal Government rejected ARITA’s pre-position model in its response to the Productivity Commission Report in May 2017 (page 25).
But I contend ARITA’s model is not cost effective for SME’s.
ASIC statistics show approximate 87% of liquidations have less than $50K in assets (Report 456 pages 55 & 53)
These 87% will not use the safe harbour protection.
These 87% will not participate in a non-distressed sale of assets.
These 87% cannot afford to pay 2 liquidators to facilitate a very simple restructure of a company that has less than $50K in assets.
Almost all of the UK prepack sales are for businesses with less than $100K in assets.
The Productivity Commission agreed with my criticism of ARITA’s model when it considered the SME market.
In the December 2015 report, the Productivity Commission stated:
“The cost of an administrator or an experienced registered safe harbour adviser may be too high for some smaller businesses heading into financial difficulty. Such businesses may have little scope to restructure.”
“The added independence from using a pre-positioning system [ie 2 liquidators] would also introduce administrative costs and delays associated with the review process, add uncertainty into the process, and could drive down the business sale price.”
The Productivity Commission stated:
“Crouch Amirbeaggi suggested an Australian hybrid model that could avoid these costs, assuage creditors’ concerns, and present small to medium enterprises with a genuine option for restructure”.
Notwithstanding the above, the ARITA web page currently states the following:
“For a number of reasons (including independence, whether the sale is for value and the lack of creditor involvement) we do not consider that a UK- style prepack process would be suitable for Australia.”
I detail some other interesting comments by the Productivity Commission as follows:
“With the sale of a small business…proportionality in risk management is key for the level of regulation. In particular, any requirements for adequate marketing should not be onerous, but sufficient to ensure a good process has been conducted and prevent clear wrongdoing.”
“There should be no expectation that a small pre-positioned sale be the subject of an exhaustive national advertising campaign.”
“The Commission is mindful of the potential for some transactions to become collateral damage from excessive regulation intended to target illegal activity.”
AIIP Endorsement of Prepacks
In its discussion groups in Brisbane, Sydney and Adelaide last year, I felt the majority of AIIP members present supported Mr Fisher’s prepack model.
I’m also aware there are members who don’t like prepacks and I value their thoughts on how to improve Mr Fisher’s model framework.
I’m delighted that the majority of the individual members that comprise the executive of AIIP and Australia’s most experienced liquidator, Mr Bill Hamilton have endorsed Mr Fisher’s new framework.
I’m hoping the majority of AIIP members will also endorse the proposed framework and the AIIP will formally endorse the framework or modified version thereof at the annual conference.