Jonathan Trimble’s advertising agency And Rising took a £90,000 hit in the House of Fraser administration in 2018. It was one of hundreds of suppliers caught up by the insolvency, which left unsecured debts of nearly £500m.
House of Fraser was “pre-packed” – that is, a sale was agreed with Mike Ashley’s Sports Direct just before it went into administration. It was one of 450 cases that year – about 30% of all administrations and up from 22% in 2016.
Such deals are under scrutiny, with a key government report out soon which could reshape the process.
Speaking to BBC Radio 5 Live’s Wake Up to Money, he said: “Bad debt – things we’d invoiced for – was £90,000. That wasn’t the only loss, though. We obviously had a contract for six months that was going to see us through the important Christmas trading period. So we had a loss of forecasted revenue as well.”
The business survived, but lost four staff. “We’re a collector of talent, so losing four people is a bigger loss than the short-term cash issue.”
Carrie James, an insolvency practitioner at Benedict Mackenzie and president of the Insolvency Practitioners Association, argues that pre-packs are often the only way to save businesses and jobs.
“If there’s nobody else interested in buying the business, the alternative is that quite often, that business would fail, so the return to suppliers or creditors would be much less.
“The point of a pre-pack should be once the business has been sold and moved forward by a purchasing party, then they continue to work with those original suppliers, the idea being that whilst there’s this element of loss, there’s also a potential for recovery.”
But for many years, there have been concerns about the lack of transparency around this process, particularly the valuation and marketing of assets, as well as communication with suppliers.
Mr Trimble said And Rising was in the middle of an ad campaign with House of Fraser when the deal with Sports Direct was struck. “Nobody really knew anything. I think this is one of the consistent themes – visibility for House of Fraser [staff] and for ourselves was nothing more than you could glean from the news.”
‘Can’t block bad deal’
In 2013, Sir Vince Cable, then business secretary, commissioned the Graham Review, which proposed a series of reforms. The government has been monitoring their impact and is about to publish its findings, which could lead to new rules.
One area of concern is when a sale is agreed with a “connected party” – an existing director or shareholder. Critics allege that the process can be abused by some business owners who dump their debts and carry on.
The Pre Pack Pool (PPP) was set up after the Graham Review to look at these connected sales, but it works on the basis of a voluntary self-referral by the buyer and is largely being ignored. Referrals have fallen from 53 in 2016 to 21 last year – a drop from 24% of potential cases to less than 10%.
Stuart Hopewell is a director of the PPP. “There was an element of hope that these deals would be referred to us, and in the first year, 24% didn’t sound too bad. But in subsequent years, going down to 10% is frustrating to say the least… Effectively we’re not seeing 90% of these deals and that was an initial aim, to make these deals more transparent.
“We’d like to see a wider remit. At the moment, technically we’re not supposed to be engaging with the insolvency practitioners. I think we should have a wider remit to engage with them at an earlier stage. It’s also bad we can’t block a bad deal. If our recommendation is, it’s not a good deal, the insolvency practitioner should take that on board and restructure the deal.”
The Insolvency Service said: “We are hoping to publish shortly the findings of our review into voluntary measures introduced in 2015 to improve the transparency of pre-pack sales in administration.”
The BBC contacted Sports Direct for comment, but the company has yet to respond.