Pre-pack receiverships need statutory framework

Last Friday, news emerged that sports retailer Elverys was going to be placed into receivership that day before being acquired by the management team backed by private investors put together by Irish corporate advisory group Capnua.

It's known in the trade as a pre-pack receivership. This quickie arrangement has been in vogue in England and Wales for a number of years but has only emerged in Ireland in recent times, as a means of rescuing companies in serious financial trouble.

As there's no formal register for receiverships, we can't be sure how many have taken place here but high-profile examples would include retailers Clerys and Superquinn, and the Irish Examiner newspaper, which was owned by Thomas Crosbie Holdings. All were viable trading companies sinking under the burden of their boom-time debts.

In each case, the lenders with charges on the businesses decided that the best solution was to sell them via this pre-pack arrangement, albeit at a loss.

The benefit of a pre-pack is that it is a short, sharp process that minimises costs. Usually, the receiver is only in place for a matter of hours as the process is heavily choreographed, with the identification of saleable assets and the selection of a purchaser already decided.

Typically, purchasers can cherry-pick the bits of the business they want, leaving behind a rump of assets to rot. Often, it involves a commitment by the new owner to inject capital to give the business some fresh impetus.

However, they are not without controversy. In the case of Thomas Crosbie Holdings, its Mahon Point-based printer, Webprint Concepts, cried foul on the basis that the new owner (which included members of the Crosbie family) was able to walk away from its contract with the company. Litigation was initiated on the matter.

Clerys
In the case of Clerys, shareholders related to former owner Denis Guiney were livid that the business was sold from under them at what they considered to be a fraction of its true value. The deal still went through, with US-based Gordon Brothers reported to have paid about €15 million for Bank of Ireland's €26 million debt.

Another key issue around pre-pack receiverships is the lack of transparency. Unlike examinerships or liquidations, there is no judicial oversight. Generally, staff and creditors know little or nothing about what’s going on until the button is about to be pressed on a deal. And there’s no obligation for the full details to be published.

For example, we still don't know what haircut AIB took on its loans to TCH, in spite of the fact that the bank is State owned and has received a €20.8 billion taxpayer bailout. Commercial confidentiality is the reason usually trotted out for the secrecy but it's just as likely to be an acute embarrassment at the level of losses incurred by the financial institution.

Transparency is at the heart of the Elverys case.

In this instance, the National Asset Management Agency is the interested financial party, based on debts related to the brothers John and James Staunton, who acquired Elverys in 1998.

Last weekend, as the deal was about to be struck, British billionaire Mike Ashley, who controls the listed retailer Sports Direct, which in turn owns 50 per cent of Irish department store group Heatons, flew into town to make a last-ditch attempt to scupper the sale.

Ashley claims he has offered 25 per cent more for Elverys than the €10 million that the management team and Capnua are reported to be paying.

Elverys had been on the blocks for about four months and Heatons was part of that process. The precise details of the Ashley/Heatons bid have not been disclosed and there’s every chance that it comes with so many conditions it’s not as attractive as the MBO/Capnua proposal, which it seems will preserve the chain’s 650 jobs and 55 outlets.

But Nama's radio silence on the matter means we have no way of knowing. Ashley's late intervention was certainly enough for the agency to pause the process, with the result that David Carson of Deloitte continues to wait in the wings to become Elverys' receiver.

This is not exactly helpful to the company, given that the cat is out of the bag about the receivership. Nama’s remit is to get the best return possible for taxpayers and it has clearly got the jitters now that Ashley has gone public.

Insolvency framework
If nothing else, these pre-pack cases highlight the need for some statutory framework around insolvency. At present, anybody here can call themselves a receiver, examiner or liquidator, unlike in the UK where a statutory framework exists.

About 12 months ago, Chartered Accountants Ireland introduced a requirement that its members gain a licence to practice as an insolvency practitioner. But there’s no legal obligation for them to do so.

The new Companies Bill, which is working its way through the Oireachtas and is expected to take effect later this year, will require that liquidators be qualified, under various criteria. It’s long overdue but won’t deal fully with the vacuum around receiverships, particularly of the pre-pack variety.

Given the sums at stake, it is surely time that the Government dealt with the matter. In the interests of transparency.