Derek Pain: Creditors and shareholders still out in cold

No Pain, No Gain
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The Independent Online

It may be just my imagination but companies, many of them well known, seem to be falling like ninepins these days. Failure statistics do not look too bad but when the likes of Regent Inns and Threshers crash within a few days of each other it highlights the difficulties many groups are experiencing.

Woolworths, which fell at the turn of the year, is, I suppose, the most high profile casualty of the recession. But there have been many lesser lights, encroaching on almost every aspect of Britain's commercial life. As the failure count has risen so has the use of what is known as pre-pack administrations a trend I find rather worrying.

For years an insolvent company simply went bust. Assets, if any, were sold, and creditors queued for any crumbs of comfort that were available. Shareholders and very often employees could anticipate little from the wreckage.

Pre-pack bankruptcies have revolutionised the failure routine. Although straightforward commercial insolvencies still occur, pre-packs, or as some like to call them, Phoenixings, are now widely used.

It is fair to say that employees involved in a pre-pack generally get a far better deal and that is to be applauded. But creditors and poor old shareholders (as always at the bottom of the pile) are usually left out in the cold.

What happens is that as debts force a business into administration, the best bits are sold often to the management, the people who created the mess in the first place. The unwanted, invariably loss-making elements, are then eliminated hopefully realising some cash, which is added to the amount paid for the more successful parts. The resultant value of the busted flush, if any, is then, after accountants charges, divided among creditors.

Bankers, whose loans may have helped the company get into trouble, often force the insolvency as they are frequently lead creditors. They are also inclined to back the pre-pack with hard cash, either equity or loan.

Such an arrangement offers a new start for a hard pressed business the dross has gone and what remains should keep the new (or old) owners in clover. But should liabilities be legally offloaded in such a controversial way? Many creditors say "no" and maintain that pre-packs are harming credit lines.

The shareholder, runs the popular theme, get all they deserve nothing. I don't argue with such an attitude when an unquoted company fails. But when a quoted (or recently quoted) operation goes to the wall, I think shareholders have the right to demand much more information than is generally available.

Clearly when a pre-pack is used transparency should be a prime requirement. For example shareholders and creditors should be told how much was paid for the viable chunks of the business? Who put up the cash and if the old management is involved what was its cash contribution and what is the size of its stake in the new-look operation?

Shareholders should also see the final profit and loss account which should contain a detailed explanation of the cost of the whole bankruptcy exercise. Such information should be posted to shareholders, not confined to obscure creditors' meetings.

Shareholders are left nursing many questions over a company's bankruptcy. A pre-pack increases the need for transparency. More information would no doubt help dispel many questions that are bound to arise over such a carefully structured exercise. I think there is also a case for shareholders in the old carcass to be given access to the reborn company.

They should have the right to buy shares in the continuation. After all, they have lost their proverbial shirts and should be able to join in the rehabilitation of their former investment. With the rotten bits jettisoned, they too should enjoy the fruits of any revival not just the management and its backers.

Pre-packs are not the only insolvency area where shareholders of quoted companies have a legitimate grumble. During my 50-plus years in the City I have been a bruised investor in a number of unsuccessful companies. Sometimes I have been provided with chapter and verse of the insolvency proceedings. On other occasions absolutely no information has emerged.

The real owners of a crashed business are far too often expected to suffer in silence.

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