Posts Tagged ‘pre-Pack’

  • GEON – It’s a Pre-Pack! Andy McCourt’s ReVerb

    Shock, emotion, uncertainty, anger and vitriol have reverberated around our industry since the announcement of GEON’s administration followed by receivership. In the midst of this, logic and reality appear to have taken the back seat. Print21’s Andy McCourt (pictured) takes a closer look at the situation.

    The term ‘Pre-Pack’ may not be widely used here but it is well known in the UK, particularly in the printing industry. In simplest of terms, a Pre-Pack administration is one where the directors have already made a deal with the administrators and receivers before placing a company into CVA (Company Voluntary Administration). The deal of course is to buy all or part of the company‘s assets back and continue business under a new name or a slightly changed version of the old name (e.g. XYZ (2013) Pty Ltd).

    Changes in 2002 to UK law, known as the Enterprise Act, made Pre-Packs legally achievable over the more dubious practice of Phoenixing. Predictably, there has been an avalanche of unpopular Pre-Packs since then. Australian law has never embraced the concept of Pre-Packs but there is no doubt the practice exists here in process if not name – click here for details.

    Corporate Law firm DLA Piper notes:

    “Despite all of the impediments outlined above, pre-pack transactions have been successfully implemented in Australia by way of a receivership sale of assets or a restructuring and trade-on through a Deed of Company Arrangement.” The full article can be seen here.

    So, a rose by any other name smells as sweet and it is possible that KKR/Allegro (KKRM) are using gray areas of Australian corporate law to achieve a Pre-Pack outcome at GEON. Incidentally, the M in KKRM stands for ‘McKeller’ after the project name to acquire the distressed debt from Lloyds and BOSI. It’s after our poet Dorothea McKellar, ironically, who wrote ‘My Country’. Insolvency law has been under review by government committees for some time. There appears to be a dire recognition for the need to change, but a distinct lack of strategy and policy to achieve it. See my column from April 2010 here.

    The June 2012 Act known as the Tax Laws Amendments Measures have been reported elsewhere to make illegal ‘Phoenexing’ to avoid PAYG tax and Superannuation Guarantee Levy payment obligations, with directors supposedly personally liable for Tax and SGL. However, first ‘Phoenixing’ must be proven and any country town solicitor would be able to challenge that. All it needs is a new company name and anyway, directors with less than 12 months service are not liable.

    This means, if any of the KKRM executives have taken or will take on directorships of GEON (currently only Samford Maier and Jack Crumlin are listed as directors), they are not liable under the Act. Speaking of Jack Crumlin, he is a partner in Norton Crumlin Associates of North Sydney, who still have the (pictured) proud boast on their website about helping Gresham and GEON. Just how is ‘success’ defined in your world, Jack? Anyway, GEON is being groomed for a Pre-Pack, not Phoenixing because Phoenixing is naughty and possibly illegal.

    Why Pre-Pack? This is the simplest question to answer. It wipes out all debt and yet leaves the assets of the concern in the hands of the former owners for a fresh start. It’s a dream process for the owners, a nightmare for creditors – unless as the owner, you are also the most senior secured creditor and your ‘debt’ suddenly becomes equity in a business with plenty of assets but no liabilities.

    It is still possible that KKRM might be ‘gazumped’ that is that the Receivers might receive a higher offer from a third party and they are legally required to consider all the best outcomes for the business. If this happens, KKRM still win as any proceeds from the sale, less fees, would go to them in majority.

    This is how the growing world of private equity works. The degree of financial and legal sophistication is light years ahead of the average print business owner-operator. Nothing in what is happening in the GEON receivership is illegal, it would appear. Sure, there is moral outrage and gnashing of teeth by unsecured creditors – and understandably so.

    Employees of GEON would have to be the group that is suffering most and what is about to happen is a 2-edged sword. Their only hope of continued employment and perhaps even some of their entitlements such as long service leave and super, is that either the Pre-Pack is successful or a White Knight buyer scoops the company. It’s not a nice space to be in.

    And what of GEON’s customers and long-term contracts? By definition the contracts are voided by the insolvency…they can choose to keep printing with GEON or take their business elsewhere.

    The entire issue is vexed with contradictions and conundrums but this is the price we pay for operating in a free market economy. When it is working well, we praise the system; when it fails, we curse it.

    I expect to see a Pre-Packed GEON emerge within 10-14 days, there are time requirements on the process. Where it goes from there is anyone’s guess.

    Let’s hope the lessons are learned and learned well.