Last week saw the “reconstruction” of the dying Everest Home Improvements business into the new Everest 2020 business. On the Better Capital website, the fund behind the reconstruction, it says over 400 jobs have been saved.

However, look beyond the statement, and listen to what else is being said either in private or in public, and there is much more to the story. And the more you look at what is being said, the more you believe that it is time to do something about pre-pack administrations.

A pre-pack guide

To understand the significance of a pre-pack administration and why its a big deal when companies go down this route, we need to know what it, and what it entails.

According to Louise Lang from The Gazette:

A pre-pack is an arrangement whereby the sale of all or part of a company’s business and/or assets is negotiated and agreed, before an insolvency practitioner (IP) is appointed with the relevant documentation being signed and implemented, immediately or shortly after the appointment is made.

Pre-packs are not a new insolvency strategy. However, the shift from receivership to administration, and the change in focus from the interests of the appointing charge holder to those of the company’s creditors as a whole – coupled with a heightened awareness among creditors, other stakeholders and the media – means that pre-pack administrations have increasingly come under the spotlight in recent years.

Easy enough to understand. Paragraph two hints upon the problems that have been put in the spotlight in recent years in our industry. A pre-pack is an option for a struggling business to escape their debt. They can form a new company, but the debt owed to creditors is unlikely to be paid back in full, or at all. This is the very controversial point that strikes the emotional bones with people. This is a legal way to escape money owed, leaving suppliers to take the biggest hits, which depending on the size of the supplier could also put them at significant risk.

The old Everest business went into a pre-pack. It’s not known what deals they have done with suppliers to pay back what they are owed. From previous events of this nature, its rare that suppliers get any significant amount of money back. They take the hit. I have had however a number of emails from either current or now ex-employees from the company to inform me of certain things. However, as I can’t yet independently verify them I can’t post details of those emails on here.

Morally, it does not seem right that it should be so easy for a company to go into a pre-pack administration, dump their debt, leave their creditors to take the hit then reform swiftly. Whilst legal, we know there is always a loser when it comes to things like this. And whilst it’s being lauded that hundreds of jobs have been saved on this occasion, you have to question how many jobs are being put a risk at the suppliers of companies who have been exposed to pre-pack administrations.

But what can be done to make this area of business legislation more fair?

Lobby or leave

There are two ways we can seek to address this. One option is highly unlikely, the other is more practical, but relies on others doing the right thing, which in our industry is less than reliable.

Option number one is to lobby to have the legislation changed to either alter the current framework or place new conditions on pre-pack administrations. I wrote in a previous piece on DGB that perhaps the law could be changed to stop the management of the old company being allowed to form a new company or re-buy the old one so easily. My argument was that the previous management team usually plays either a part or full role in the problems with the old business, and the new one should be given a new chance with new people to see if they can make a better success of it. In the case of Everest, I believe the existing management structure is there in the new one.

The problem with the first option is that would require laws to change. That takes time, lobbying of the right Government committees, and right now, with COVID-19 and Brexit phase 2 coming to a close, this simply isn’t going to register on the radar.

So option two is the more actionable. And that is for suppliers to simply stop dealing with companies that phoenix or have a bad management track record. We all know our industry is littered with companies who die, only to reform the day after, leaving all their debt behind for their suppliers to take the hit on. Yet, they always seem to find new suppliers or even the same ones they bailed on last time. If as an industry we want to show the more professional side, the more mature side, then we would take a collective decision at the supplier level to stop dealing with these types of businesses. Lock them out. Let them know that if they wish to recuse themselves of their debts and responsibilities, only for someone else to pick up the tab, then they’ll have nowhere to go if they decide to reform.

The argument for suppliers to continue to deal with phoenix companies is that the long game sees them claw their money back from the new company over a long period of time by way of pro-forma invoicing or less favourable pricing for the new company. That strategy doesn’t always work, however, either because the new company quickly goes bust again, or the new company simply doesn’t do as well next time around so order levels aren’t as good as they could have been. More importantly though, if suppliers continue to deal with reformed businesses after debt-unloading, then it tells the entire industry that it continues to be OK to conduct their business like that and that if they go bust, they will, sure enough, be able to find another supplier no problem.

We’re enabling it. We’re happy to complain about it, but if we want to do something genuine about it, then we have to agree not to supply genuinely bad people and companies who haven’t been honourable. It would require a change in attitude and collective effort. It can be done, its been proven by many during this crisis. Do I think it will happen? Probably not. The pound signs outweigh the logic and ethical code, and sure enough, new companies will always find new suppliers straight after they have landed their previous suppliers with a ton of unpaid debt.

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