ASIC was recently asked in parliament for its views on “prepacks”, or pre-packaged insolvency administrations, with understandably cautious responses given. A law reform recommendation to allow pre-appointment sales remains with government. When or if it comes to decide, the government will need to see how other countries have progressed on this issue, with the possibility of the pre-packaging of a major law firm being reported. .
In a Parliamentary Joint Committee inquiry into ASIC, on 25 November 2016, Senator John Williams noted that 9,000 small businesses fall over in Australia each year. He then read from a submission:
“Given the average cost of voluntary administration is about $80,000 and only 4% of insolvent companies use administration to restructure, is Australia’s current statutory framework an effective tool to save the 9,000 or so small businesses that become insolvent each year?
We know administration works well for the big companies, the management set-up et cetera. I am talking about the small companies that have little. As soon as they go into administration they just seem to fall over into liquidation”.
The Senator said that “anything that is an opportunity to get businesses to survive is a very good thing, especially small businesses”.
As ASIC then explained,
“prepacks, essentially, are a procedure where some or all of a company’s assets are packaged together and transferred (to a purchaser) prior to the appointment of an administrator. … Certainly, a company could use a prepack to preserve value for creditors, and that is a very positive thing. On the other hand, if there are not good controls in place a prepack might be used to facilitate phoenix activity. That is where the debate around prepacks tends to occur”.
ASIC went on to explain that the Productivity Commission’s recent report into business set-ups, transfers and exits – report no 75 – did suggest that consideration be given to “pre-positioned” sales, as a type of prepack, with various controls put in place.
The PC report has been with government since September 2015. ASIC commented that the report was worthy of consideration. Prepacks can provide a valuable role, the issue being what safeguards are needed to ensure that phoenix activity is not thereby encouraged – businesses should be allowed to “exit in good fashion”.
See my earlier comments on developments in the UK.
As to the use of prepacks in dealing with insolvent professional firms, a recent example in the UK is the accountancy firm MG Associates which came into financial difficulties through adverse litigation.
As CCH reports, “within days of the appointment of administrators”, accountancy firm MG Associates Limited was “resold to the wife of one of the firm’s current directors following a pre-pack sale organised by administrators”. The administrators reported that as a result, the management and staff would remain unchanged and business customers would experience almost no disruption to their services. One office of the national firm had to be closed. The only real alternative would have been to liquidate the company. The business was said to have been “extensively marketed before the administration and, whilst there was significant interest, the best offer was received from” the new owner.
Baker Tilley’s purchase by way of a prepack of the financially troubled RSM Tenon in 2014 is another UK example.