Memorandum submitted by the UK Shareholders
Association
I understand from an article in the Daily
Telegraph that you are taking up the issue of Pre-Pack Administrations
and I think this is very timely. In my personal view Pre-Pack
Administrations are an abomination and should be made illegal.
It is totally wrong for an Administrator to
act in advance of his appointment as Administrator which is what
happens in practice at present. Often arrangements are made with
the connivance of the company's directors or bankers which are
not in the interests of creditors or shareholders. These arrangements
are often made in secret with no public knowledge and then put
into place in a matter of a few hours after formal appointment
of the administrator.
I have experience of this process not long ago
in the case of Torex Retail Plc. This was a company that got into
financial difficulty after an alleged fraud and claims of false
accounting. The directors arranged to sell the business via a
Pre-Pack Administration to some private equity investors—this
mainly was to the advantage of the bankers who protected their
loans to the company but also obtained a stake in the on-going
business. This meant that shareholders were left with nothing,
and creditors were presented with a fait-accompli.
Torex was in essence a sound business that could
have traded out of its problems given a short period of stability
and some protection from short term creditors.
Before the Administrator was officially appointed,
we tried to arrange an alternative refinancing which would have
protected shareholders and other stakeholders' interests, but
the directors ignored our approach. We then requisitioned an EGM
to remove the directors and replace them, but the Administration
was pushed through that pre-empted this move.
In essence there was no approach by the Administrators
to the open market, no consideration by them of alternative offers,
and the whole deal was stitched up behind closed doors before
most people knew anything about it.
This was surely not how Administration was conceived
as working when it was put in place by the original legislation.
Regrettably legal precedent has been established that seems to
condone this practice, and now companies left, right and centre
are using it to evade their debts and create new "phoenix"
businesses from the ashes of companies in financial difficulties.
The directors or parent/related companies often being the beneficiaries
of these arrangements.
I hope therefore that you will try and get some
changes to the legislation to outlaw this practice.
13 January 2009
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