Moves afoot to propel pre-packs onto political agenda

Pre-packs proposalProponents push pre-packs as pre-insolvency panacea.
Proponents of pre-packs not giving up on government.

Pre-pack proponents Nick Crouch (L) and Richard Fisher AM.

Pre-positioned sales or pre-packs might trigger an involuntary cringe reflex in politicians and regulators hyper-sensitised to the risk of illegal phoenix activity but that isn’t stopping insolvency law guru Richard Fisher AM or liquidator Nick Crouch, who are combining forces to put the concept on the political agenda.

Presenting at a meeting of the Association of Independent Insolvency Practitioners (AIIP) yesterday, Fisher and Crouch explained to attendees that the government’s consultation paper titled: Corporate Misuse of the Fair Entitlements Guarantee (FEG) Scheme had provided a hook for the insolvency and restructuring professions to get pre-packs over the line.

“There’s strong evidence to support the view that if nothing else, pre-packs save jobs,” the Adjunct Professor of Law at the University of Sydney told his audience, quoting evidence from the UK where pre-packs have been legal for 15 years. “This could reduce the budgetary burden on the FEG scheme,” he said.

Fisher’s submission points out that the Productivity Commission had already identified “pre-positioned sales” or pre-packs as an initiative that could alleviate the budgetary burden on the FEG scheme, payouts from which have swelled.

The submission also argues that pre-packs provide a way for government to regulate the pre-insolvency market, discourage illegal phoenix activity and provide for the legitimate restructuring of small insolvent enterprises, which constitute the vast majority of external administrations.

The Government’s Consultation Paper, released in May 2017, stated: “Costs under the FEG scheme have dramatically increased with FEG payments totalling more than $1 billion between 2012-13 and 2015-16. This represents a 75 per cent increase over the preceding four year period.”

Fisher and Crouch told the meeting that their proposal was tailored for the smaller end of the insolvency market only, that being the 7,500 on average appointments per annum involving companies with assets of $250,000 or less and an average of five employees.

The current voluntary administration regime was, the meeting heard, too expensive for exads of this size. In 2016 for example, 85 per cent of exads had assets of less than $100,000.

Fisher’s proposal includes the creation of a pre-pack approved liquidator who would engage the valuer and monitor the process but otherwise let the director or directors do the work.

ASIC, Crouch said, would be responsible for screening liquidators seeking pre-pack approval status. He also stressed that the proposal wasn’t perfect but was superior to the VA regime which tended to suck all the value out of smaller jobs leaving nothing for creditors and merely forestalling the inevitable slide into liquidation and the triggering of FEG payments.

From SiN’s perspective the one piece of data required to make the case airtight is evidence showing the budgetary burden on the UK’s version of the FEG scheme has declined since pre-pack’s were introduced.

About the Author

Peter Gosnell
Sydney Insolvency News illuminates the practice of insolvency in Australia's largest city, highlighting the triumphs and failures of Sydney's registered practitioners and the accounting and legal professionals who work with them. SiN is produced by Peter Gosnell, former business editor and senior business reporter at The Daily Telegraph newspaper. During a decade-long career, your correspondent reported on such notable corporate collapses as HIH, One.Tel, Westpoint and Fincorp as well as some of the nation's highest profile bankruptcies and the investigations and prosecutions arising from Australia's most notorious instances of white collar crime.

6 Comments on "Moves afoot to propel pre-packs onto political agenda"

  1. Richard Brien | 16 August 2017 at 9:30 am | Reply

    A nice simple solution to a part of the marketplace which is currently out of control

  2. Pre-positioned sales as recommended by the Productivity Commission are not pre-packs. The PC adopted ARITA’s policy positions and we do not support pre-packs due to their lack of transparency, lack of proper review by an independent liquidator or the disregard of the rights of the wider creditor body.

    • The Fisher proposal would seem to deal with concerns about liquidator independence with its recommendation that a special pre-pack approved liquidator qualification by created and licensed by ASIC.

  3. A pre-pack only works if the business is sold to an arms length third party and not just for the value of the plant and equipment. If it is sold to a related party, the related party is picking up the business and walking away from the problems they created. I think the new changes to the law should make it easier for directors to seek help and also be confident that a restructure can be done through the insolvency regime.

  4. One of the challenges for proponents of pre-packs is the 2013 analysis of the UK position by Margaret Graham, who found that they deliver a a ‘paltry benefit’ – no distribution in 60 percent of cases and a median return of 4.3 percent for those where a distribution was made. Some details of her study here: https://australianloanrestructuringissues.com/2015/10/11/pre-pack-administrations-would-they-work-in-australia-3/

  5. Les Williams | 17 August 2017 at 5:55 pm | Reply

    The bank got more than a paltry return in the Walton Construction Group pre pack – they recovered 100% everybody else funded that

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