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Phoenix firms, pre-packs and emotional blackmail

The word of the year in the world of print and paper has been “pre-pack.” Initially welcomed by the industry as a method to salvage insolvent companies, giving them time to live again under a new name and retaining their workforce, pre-pack deals have become tainted.

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The classic phoenix company closes one day a few days later reopens with apparently little having changed except the name

Pre-packs began life in 2002 under the Enterprise Act, to allow for the sale of an insolvent firm’s business and assets before the company goes into administration. Its main advantage is to retain all or some of the workforce, and essentially keep the business afloat and prevent the company from disappearing. However, the downside is unsecured creditors may not get paid and it can leave a bad taste among suppliers and customers, who are left high and dry. They may not wish to deal with the new company having been stung once, especially if those running the new company are more or less the same as before, and worse still, appear not to have changed their business model to prevent the business collapsing again.

This year saw the demise of Headley Brothers is Ashford in Kent. A pre-pack deal saw some of the plant retained under the new firm of Stones Ashford. Within months, the new company had got into difficulties and collapsed after the electricity got cut off by E.on. It is the example of how things can go wrong when pre-packs are designed to save businesses. In the print industry, there have been several pre-packs in recent times including SPS becoming Specialist Print Services, and in Portsmouth PPG morphed into PPG Print Services through a pre-pack. There is nothing illegal about these deals but there have been concerns raised in some quarters. Away from the industry for instance, the turkey producer Bernard Matthews, the bed company Silentnight and the textile group Bonas were all subject to such deals which have led to calls for the system to the reformed.

It is perfectly legal to set up a Phoenix Company, as long as the assets are acquired at market value following a formal insolvency process such as a Pre-Pack Administration or Liquidation

Some people on social media have described some pre-packs as little more than phoenix companies. Essentially firms that reinvent themselves using the same people, the same premises, the same equipment and even a similar sounding name. And they do it by using pre-packs to stay within the letter (if not the spirit) of the law, leaving suppliers in the lurch.

Licensed insolvency practitioner Lisa Hogg of Wilson Field comments: “It is perfectly legal to set up a phoenix company, as long as the assets are acquired at market value following a formal insolvency process such as a pre-pack administration or liquidation. This ensures that all regulations are complied with and all creditors are dealt with appropriately.

“It is not legal however, to set up a phoenix company in order to transfer assets from an insolvent company for free or significantly less than its value. Setting up a phoenix company for this purpose may be considered a ‘fraudulent transfer’ if the company then goes on to enter an insolvent liquidation process, and the transaction can be reversed by the Courts. The consequences for abusing a phoenix company in this way can include directors losing the protection of limited liability, and being personally liable for the company’s debt, or even be accused of criminal wrong-doing depending on the severity of the circumstances."

BPIF’s Charles Jarrold criticised the way the industry’s scrutiny body known as the pre-pack pool operated over the Polestar affair which saw numerous creditors loose out. Concerns have also been raised over the way the Anton Group operated which has allegedly left a trail of financial woe for some and a pending legal case. Others have also called for reform such as Professor of Accounting Prem Sikka, of Essex University, who adds: “Company directors can walk away from legal obligations to fund pension schemes with the full knowledge that Pension Protection Fund (PPF) will step in. Pre-pack insolvencies are harming pension schemes and are ripe for major reforms.” PPF’s Alan Rubenstein agrees and says that: “as insolvency law is currently configured, they [pre-packs] can be used inappropriately to dump the company’s liabilities, including the pension scheme, through dropping a company into administration with a sale prearranged.”

Company directors can walk away from legal obligations to fund pension schemes with the full knowledge that Pension Protection Fund (PPF) will step in

Ian Carrott of ICSM in Somerset, the print industry credit intelligence group says 2017 has seen an unprecedented rise in firms hitting the buffers and of some companies potentially using pre-packs to circumnavigate the law. Carrott is particularly concerned about the rise of phoenix companies as the economy gets tougher. He comments: “They’ve always been around but members of ICSM have been alerting us to their rise in number this year. They pull the plug on one business and set up shop almost immediately from the same premises with a slightly different name. ICSM circulate confidential information within our members to alert companies about who is not paying their bills, or is in trouble or who have taken a major hit which may cause problems.”

Carrott says the secret of survival in a tough environment is to stick to your terms of trade. If a customer fails to pay on time then credit must be withheld until their do pay up. Some firms use emotional blackmail or threats of withholding future business if they are not allowed longer credit terms, but these must be resisted he says.

If you have an interesting story or a view on this news, then please e-mail news@printmonthly.co.uk

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