The term "Pre-Pack Administration" (or "pre-packaged sale") refers to an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an Administrator. Then, immediately on, or shortly after his appointment, the Administrator effects the sale. Often this sale will be to a "connected" party, typically the existing management or owners of the insolvent company (minus the debts of course), in which case the process is known as "Phoenixing".
Here's our experience. Back in 2007, around fifty-five people (many of whom do not speak English as a first language) were exploited by an unscrupulous employer, after the Directors of that business suddenly started bouncing staff wage cheques and later claimed that they were having temporary cash flow problems - allegedly due to a slow-paying customer - but insisted that the company had a full order book and was in robust financial health; further promising the employees that wages owed would be repaid as soon as money was received from the customer.
Money owed was never repaid, and the company refused to issue payslips or contracts to their workforce for the missing wages, so staff consulted the local Jobcentre, but were told that if they walked out, they would have made themselves "intentionally unemployed" and therefore would be ineligible to claim any sort of benefits. Legal advise was sought, but the only advice that the employees were given was to go to an Employment Tribunal, which in turn could only be done one month after grievance letters has been issued. Therefore, grievance letters, arguments and Employment Tribunal claims ensued after the next month, because the staff now had no income to pay their rent and bills, whilst Landlords threatened them with eviction, since they wouldn't believe that employees were working for the past two months, but not but not getting any money.
This compulsary month delay is supposed to allow Employers and Employees to reach a settlement without using the Tribunal service. However, the Directors simply refused to speak to ACAS, ignored Employment law and legal correspondence, including Solicitor's letters and other legal paperwork - instead choosing to bully, intimidate and harass employees that initiated Employment Tribunal claims into leaving, so that they would not have to make redundancy payments - all of which made life extremely difficult and stressful.
At that time, Ealing North MP Steven Pound was contacted (he was the local MP for the area in which the aforesaid business was located), and he said:
The withholding of earned wages is a criminal offence. No "ifs" and no "buts".
Get the Police involved and they'll bring in the Fraud Squad!
The Police, however, refused to become involved with what they termed "Civil matters", at which point Mr. Pound decided that because I wasn't his constituent, he couldn't help further, and suggested writing to my then Local MP (Tony McNulty). Mr. Pound said that he would forward my correspondence to Mr. McNulty, and I also wrote directly to Mr. McNulty. Tony McNulty decided to ignore both of us.
After many months of legal wrangling, Employment Tribunal claims were won, and again ignored by the company Directors, along with subsequent enforcement of those Tribunal claims through the County Court, further Employment Tribunals, and eventually claims for Constructive dismissal.
Later (After being presented with a winding up order by HMRC) the Directors simply closed the company, and quickly reopened under a different name - carrying on the same line of business, using the same plant and machinery, operating from the same premises, with the same Top Management and shareholders, as well as the same customers and suppliers.
At this point, it transpired that there was no slow-paying customer, but that the company's financial Auditors had qualified the company's previous annual accounts with doubts about the solvency of the company, high levels of bad debt, and had further questioned the potential resale value of large amounts of stock held... The Directors had then gone on to abuse an invoice factoring service by submitting large numbers of invoices for goods that had never been manufactured, which we now believe lead to the withdrawal of the banks support of the business [PriceWaterhouseCoopers (PWC) was sent in by Bank of Scotland Cashflow Finance, although we were never told why at the time], and ultimately caused a withdrawal of credit lines by suppliers.
This rogue employer then failed to pass employees details to the Insolvency Practitioner, so that workers were not even made aware that they had lost their jobs until after Christmas. Further, they later discovered that as well as wages, neither PAYE nor National Insurance contributions had been paid, causing additional problems that they were left to straighten out with HM Revenue & Customs.
Next, the former company's Statement of affairs was found to be greatly at variance with the witness statements of former employees and the findings of numerous Employment Tribunals. So, many former employees complained to the Government Insolvency Service, The Serious Fraud Office (SFO) and Companies Investigation Branch (CIB), whilst the Insolvency Practitioner also submitted an adverse report about the Directors to the Insolvency Service - The Government ignored all these reports
Despite all of this, Legal experts, the High Court and two different Insolvency practitioners say that there is little that can be done now, since the Directors of this company have exploited a loophole in the Law, (which quite obviously needs to be addressed)... I have therefore contacted the current local MP, Mr. Bob Blackman, who, after I had sent him numerous letters and follow-ups requesting an acknowledgement or response - over a period of many months - instead of arranging that the Directors be struck off, starting an inquiry into this scandal or introducing new legislation to close the loopholes in the Law (and forgetting all about compassion, integrity, fair dealing or accountability to the wider community), finally tried to bury the matter by responding with a terse message, backed up by Edward Davey (then Minister for Employment Relations, Consumer and Postal Affairs) saying:
[pursuing this matter] is not in the public interest
As you might imagine, we were shocked and surprised to be given such an arrogant, dismissive response; and even more astonished to find that Mr. Blackman - who is supposed to be representing the interests of Harrow East constituents - ignored further correspondence, whilst attempts to pursue this matter by telephone only elicited the comment that "Mr. Blackman is busy", from his Office staff, and then zero attempts to return phone calls. Similarly, messages sent to him via other Members of Parliament received the same brick wall response. At which point, the Impeach Bob Blackman campaign was founded, because it appeared that Bob Blackman was siding with the corrupt Directors of the business that we worked for, and was refusing to help the former workers.
At this point, it might be helpful to summarise why we say there was wrongdoing and unfitting conduct exhibited by the Directors:
- Employees were given wage cheques which the Directors knew would not be honoured
- The Directors then lied, when they claimed that the company only had "temporary cash flow problems" and "a slow-paying customer"
- After the dishonoured cheque incidents, employees earned wages were still withheld for many months
- The Directors again lied about having a full order book (when instead they knew about the precarious state of the company)
- Employees were refused payslips for weeks when they were not paid
- The Directors made every effort not to keep written records of this scandal
- The Directors refused to speak to ACAS or Solicitors, etc.
- The Directors told more lies claiming that all the money owed to the workforce would be paid back
- The company's Financial Auditors had previously noted the poor financial state of the company in 2006 and 2007 - A fact which the Directors hid from the staff
- Bank of Scotland Cashflow Finance had caught the Directors making fraudulent claims against an invoice factoring service, for goods that had never been manufactured
- The Directors refused to give employees written employment contracts
- The Directors ignored grievance letters from employees
- The Directors ignored all the Employment tribunal claims brought by employees
- The Directors ignored all the communications from ACAS and Solicitors
- The Directors tried to bully and intimidate employees who brought Employment tribunals into leaving
- The Directors ignored all the Employment tribunal Judgements won against them
- Employees won all the Employment tribunal cases they started, and the Directors were severely criticised by all members of the Tribunal panels
- The Directors ignored all the Enforcements of Employment tribunal Judgements
- The Directors told more lies, such as "there's a worldwide shortage of glass", when it transpired that Suppliers had instead frozen the company's credit lines
- The company quite obviously traded for a lengthy period whilst it was insolvent
- The Directors secretly put the Company into Administration over Christmas, so that employees had no chance to consult on the matter
- The Directors then opened the exact same type of business (just with a different name), so that they could evade paying what was owed to the workers
- Staff were left poorer, stressed, suffering sleepless nights, and eventually unemployed
- Employees complained to Companies Investigation Branch - who ignored the matter
- The Insolvency practitioner submitted an adverse report about the Directors to the Insolvency Service
- Former employees of this business are still owed a considerable amount of money
- The phoenix company formed when the Directors purchased the assets from the Insolvency Practitioner has since never posted any accounts with Companies House after its incorporation in 2008
- This phoenix company has since gone bankrupt, putting yet more employees into the same scandalous situation
- We have since been told that the same Directors now plan to exploit the assets (and yet more unwary staff) a third time - presumably putting more poor staff through the same troubles that workers at the previous two businesses experienced
Finally, it's worth noting that the Association of British Insurers serverely criticises pre-packs, warning that they are being actively marketed by restructuring advisers as a convenient way in which to "dump debt" and start afresh, free of "troublesome" creditors.
** update **
A year and a half later, Bob writes to express his sympathy with the "victims" of this scandal, and says:
In my view, the law needs to be changed to prevent "phoenix" companies from acting in [this] way...
Interestingly, Mr. Blackman also says that he had raised the matter in Parliament, in this question.
None of us can quite fathom what this has to do with workers having their wages withheld, or why Bob Blackman kept this information secret until now, and failed to mention it in his prior correspondence. But we're glad to hear that Mr. Blackman agrees that the law needs to be changed.
However, it's important to remember that in the past two and half years, there have been no improvements for the former workers, and Bob's voting record relating to Employment law shows that so far he has always been loyal to the Conservative party and their intention to implement the Beecroft report.
[The Beecroft report is a controversial document commissioned by David Cameron, and authored by Venture capitalist Adrian Beecroft (the man behind Wonga loans - who have recently been warned by the OFT over threatening debt collecting tactics), proposing that employment regulations are strangling Britain's economic growth.]
** update **
Better late than never, Bob Blackman did raise the issue in an Adjournment debate prior to the 2012 House of Commons Christmas recess, which with a bit of luck might catch the attention of the Whitehall elite.
Hopefully, Mr Blackman will now start making a concerted effort to change the law, so that other employees won't be abused in the same way that we were.
Further updates will appear here, as they become available.
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