Memorandum submitted by the British Printing
Industries Federation (BPIF)
PRE-PACKS AND THEIR IMPACT ON THE UK PRINTING
INDUSTRY—A SUBMISSION BY THE BPIF TO THE BERR SELECT COMMITTEE
ENQUIRY INTO THE INSOLVENCY SERVICE
1. INTRODUCTION
The British Printing Industries Federation (BPIF)
is the trade association for the UK printing industry. It has
1,915 member companies with 77,000 employees, covering approximately
55% of the industry by turnover. We provide a wide range of business
services critical to developing and growing healthy, sustainable
businesses. Through our team of around 50 advisors and consultants,
all industry experts, we deliver high quality, bespoke advice
and support to printing companies, where, when and how they need
it.
The UK printing industry has a turnover of £15.3
billion and employs approximately 150,000 employees in around
11,500 companies across the UK. It is a vital manufacturing sector,
which is of strategic importance to the UK economy. It has harnessed
technological innovation to make an increasingly positive contribution
to the UK balance of trade, and it supplies every sector of the
UK economy. It is an industry comprising predominantly small companies—only
60 printing companies in the UK employ over 250 people. In many
segments of the printing industry, for example jobbing and promotional
print, the cost of entry is relatively low compared with much
of manufacturing industry. It is an industry where entrepreneurs
can get started—and fail—relatively easily. Overcapacity
is very much a feature of the industry and not surprisingly therefore,
consolidation—through closures, rationalisation, mergers
and acquisitions—has been taking place in the sector for
many years. This trend is set to continue apace in the years ahead.
Price pressures are intense, with many customers buying on a purely
commodity basis and exploiting the fierce competition that overcapacity
inevitably creates. The purchase and sale of companies—often
through pre-pack deals—is common, usually where companies
have become distressed as they fail to keep pace with the competition.
2. WHAT IS
A "PRE-PACK"?
The term "pre-pack" refers to an arrangement
where a deal is struck to sell an insolvent company's assets to
another party before it enters insolvency.
Insolvency practioners (IPs) have argued that
these preserve more jobs: a recent research report by R3 found
that 92% of pre-packs resulted in a 100% transfer rate of employees
to new owners, compared with 65% in other types of sale following
insolvency. It has also been argued that where small businesses,
which trade on their reputation, are concerned, a quick administration
is essential.
However pre-packs are also often criticised
for being a "stitch-up". Businesses can write off debts
owed to creditors through the arrangements, with the new owners
sometimes the same as the old owners, as in the recent DSR case
where DSR Print Management's business and assets were bought by
the company's owners in a pre-pack deal following the Northampton-based
print manager's fall into administration (see below).
3. IMPACT OF
THE ENTERPRISE
ACT 2002
There is no doubt that pre-packs have been used
more frequently by IPs since the introduction of the Enterprise
Act 2002, which includes measures to encourage the rescue of more
businesses. However there have been cases where the pre-pack facility
has been abused, for example where IPs help sell a business back
to its original owners free of debts without considering marketing
the business, or where they proactively target failing businesses
- offering the owners an easy way out of debt through a pre-pack
sale to a newly-formed phoenix company that allows them to hold
on to the original company's assets.
4. REACTION OF
THE INSOLVENCY
PROFESSION
There is evidence that the IPs professional
body is sensitive to the adverse publicity such cases bring. The
rules governing pre-packs are to be tightened up by a new code
of ethics on company wind-ups, published in October 2008 by the
Insolvency Practioners Association. Statement of Insolvency Practice
16 calls for IPs to make disclosures on topics such as valuations
when reporting to creditors after the sale of a company has been
completed. There is a disciplinary element to the new code, which
would mean IPs could find themselves open to disciplinary action
from their governing body if they could not explain a deviation
from the rules.The aim is to put creditors' minds at rest that
IPs are getting the best value for companies out of a pre-pack
and also to ensure best practice in the insolvency community.
Many of our members are sceptical about the effectiveness of SIP
16, given their experiences to date. Accordingly we believe that
the impact of this should be carefully monitored, with consideration
being given to the introduction of statutory measures if it is
found wanting.
5. RECENT EVENTS
A number of members have recently expressed
their concerns about prepacks, following the recent developments
concerning the sale of DSR Print Management to new owners DSR
Group. DSR Print Management, which recorded a turnover of £18.7m
in 2005, failed because of the collapse of its largest client,
furniture retailer MFI, which left it with a substantial bad debt.
DSR Group announced that they would be based at DSR Print Management's
site in Northampton and that all DSR Print Management employees
would be transferred to DSR Group.
6. IMPACT ON
PRINTING COMPANIES
Not all prepacks necessarily involve malpractice.
Some involve a new management team coming in, with fresh capital
and a clear plan of action for the business geared to turning
it around. Even where the existing management team buy the business,
it may be that they have been trading responsibly previously but
have been hit by loss of contracts, bad debts etc and forced to
close: in such cases it may be a case of bad luck, or it may be
down to poor management of course. However the difficulty facing
member companies is that regardless of the "virtues"
(or otherwise) of any particular case, they still end up being
faced with a competitor who has a clear trading advantage over
them, especially if they themselves are heavily laden with debt.
7. POLITICAL CONSIDERATIONS
The Government's philosophy is to encourage
new business start-ups and of course the Enterprise Act 2002 makes
it much easier for businesses to get started, and for those involved
in failed ventures to start again. All indications are that the
Government is unlikely to wish to reverse these provisions, although
we believe that both Government and Opposition should be aware
of, and should seelk to address, the adverse consequences of the
current legislation that are now impacting on industries such
as print.
8. MARKETING COMPANIES
TO OTHER
PURCHASERS
In an overcapacity industry such as print, prepacks
can often be the only way that an unprofitable business can be
sold intact. With fellow printers hungry for new contracts and
customers jumpy at the prospect of loss of supply (especially
in sectors with short publication deadlines), the interests of
employees, shareholders and customers alike may be best served
by keeping the sale under wraps until the deal is concluded. This
is little comfort to competitors of course.
However it may be that more can be done to ensure
that vendors are required to make discrete enquiries into who
else is in the market for purchasing the type of business concerned,
so that at least other purchasers have the opportunity to bid.
It would also prevent an IP being able to hide behind a claim
that they had to pre-pack the sale to a given purchaser (or back
to the original owners) because no-one else was interested in
buying. We are exploring whether the BPIF can play a role in this
in relation to the printing industry, by establishing a confidential
list of companies interested in purchasing others. However it
may be that the Association of Busness Recovery Professionals
(R3), as the trade body for the insolvency profession, could also
play a role here across the wider business sector, with support
from Government.
9. THE NEED
FOR ACTION
BY SUPPLIERS
The position of suppliers is crucially important.
It is in their clear interest to withold credit facilities to
prepacks until the new owners have at least demonstrated some
willingness to pay off past debts. That isn't necessarily to say
they shouldn't supply them at all, but rather that they should
insist on payment up front (which would go some way to redressing
the competitive balance with other printers). However there are
some notorious cases where suppliers should consider not supplying
them at all.
10. SUMMARY
We submit that the following actions should
be considered in response to our members' concerns regarding pre-packs:
(i) Government should evaluate the adverse consequences
of the current enterprise legislation that are now impacting on
our industry through pre-packs.
(ii) The effectiveness of SIP 16 should be carefully
monitored, with consideration given to the introduction of statutory
measures if it is found wanting.
(iii) Government should support initiatives to
establish a confidential list of companies interested in purchasing
others, providing scope for other purchasers to have the opportunity
to bid and denying IPs the ability to argue that no-one else was
interested in buying.
(iv) Suppliers should be encouraged to refuse
credit facilities to prepacks until the new owners have at least
demonstrated some willingness to pay off past debts. Normally
this would involve continuing to supply but insisting on payment
up front, although in some cases suppliers should consider not
supplying at all.
January 2009
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