Impact case study database
- Submitting institution
- University of Wolverhampton
- Unit of assessment
- 18 - Law
- Summary impact type
- Societal
- Is this case study continued from a case study submitted in 2014?
- No
1. Summary of the impact
Research by the Law Research Centre highlighted significant practical issues in relation to pre-packaged administration (pre-packs). Solutions to the problems associated with pre-packs were suggested by the Government-appointed independent Graham Review of pre-packs, which chose the Law Research Centre to conduct research to provide the necessary data regarding, and to highlight and advise on, specific issues relating to pre-packs. The research informed the recommendations made by the Graham Review in June 2014 and led to significant Government policy decisions and changes to professional practice. The research has been used to inform a similar debate in Australia, and been recognised judicially.
2. Underpinning research
The research was conducted by members of the Law Research Centre led by Professor Peter Walton. Professor Walton was the first person (in 2006) [R3] to identify a number of legal and practical problems with pre-packaged administration. It involves the immediate sale of a business on the appointment of an administrator without any recourse to the views of a company’s creditors. Walton has written on legal, theoretical and comparative aspects of pre-packs. In addition, his comparative work [R2] considered how the Australian courts would view an attempt to introduce UK pre-packs to Australia. It led to the Finding [F] that:
F1. The stronger regulation of conflicts of interest would prevent pre-packs being permitted in Australia. This links closely with and underpins Impact I2.
Following a competitive tender process, Professor Walton’s reputation as the leading specialist in the area led to his appointment by the UK Government to conduct research for, and present interpretations of the resulting evidence to, the independent Graham Review [R1]. The research was carried out throughout late 2013 and early 2014 by Professor Walton and Chris Umfreville with the statistical assistance of mathematician Dr Paul Wilson. Walton designed the research project to include a large number of datapoints (over 30 per administration) collected in relation to a significant number of administrations (500 pre-packs commenced in a single year and a comparator group of 100 traditional administrations) which followed through the subsequent history of both the company entering administration and the purchasing company.
A regression analysis of pre-pack administrations assessed the procedure’s ability to deliver viable purchasing companies. The study looked at the failure rates of purchasers from a pre-pack (and compared them with traditional administrations) and identified which determinants were the strongest predictors of subsequent failure.
The key Findings of the research showed that, although there were some benefits to the use of pre-packs, there were a number of problems with how pre-packs operated:
F2. The principal problems were identified as: inadequate marketing where marketing was conducted by the directors or internally within the administrators’ own networks;
F3. Inadequate valuations of businesses where frequently a limited desktop valuation by the administrator was conducted;
F4. An absence of evidenced viability of the purchaser;
F5. The link between sales to connected parties and subsequent failures of the purchaser; and
F6. Statistically deferred consideration was not a factor in business survival.
Findings F2-F6 link to and underpin Impact I1.
Based upon the research the Graham Review recommended voluntary provisions, which were all adopted. The recommendations dealt with how to market and value businesses, how to conduct a viability review of the businesses and the introduction of the “Pre-Pack Pool” which brings some objective judgement to the decision whether the case for a pre-pack is proven in cases where the purchaser is a connected person. Consistent with the findings of the research, it did not suggest amendments to purchases using deferred consideration.
3. References to the research
The following research outputs which have been through a rigorous peer-review process. As shown below, they are points of reference for further research beyond the original institution. Evidence of peer-reviewed funding is also given below.
R1. Pre-Pack Empirical Research: Characteristic and Outcome Analysis of Pre-Pack Administration Final Report to the Graham Review April 2014 prepared by Professor Peter Walton and Chris Umfreville with the assistance of Dr Paul Wilson. (REF 2 Output)
R2. M Wellard and P Walton, ‘A Comparative Analysis of Anglo-Australian Pre-Packs: can the means be made to justify the ends?’ (2012) 21(3) International Insolvency Review 143.
Evidence of the quality of the group’s research is demonstrated by:
Its acceptance by the Graham Review and the subsequent acceptance by the UK government of the Graham Review’s recommendations based upon the research report [R1]; and
Its citation and approval by the Australian Federal Court in Re Ten Network Holdings Ltd [2017] FCA 914, [2017] BPIR 1707 at paras [17-23] [C10].
R3. P Walton ‘Pre-packaged administrations – trick or treat?’ (2006) 19 Insolvency Intelligence 113 – 122.
This article was the first publication that shed light on the legal and practical difficulties of pre-packs. It was seen as so significant as to require an immediate response in the same law journal by senior insolvency practitioners - A Bloom and S Harris ‘Pre-packaged administrations - what should be done given the current disquiet?’ (2006) 19 Insolvency Intelligence 122 – 123.
Grant
Insolvency Service, GBP19,220, Pre-Pack Empirical Research. R1 refers.
4. Details of the impact
The research has had a direct impact on the law and practice in the UK. Parliament has recognised issues surrounding pre-packs as significant both in 2015 and in 2020. The scale of the impact is that it has affected thousands of businesses (and their employees) which have entered into a pre-pack since 2015. The research and its methodology have been relied upon by the Government and the insolvency profession as evidenced by significant practical and legislative changes in the UK. In addition, the research has been used to inform the debate on pre-packs, and judicial thinking, in Australia which has legislative and regulatory regimes comparable to those in the UK.
I1. Impact in the UK
The research findings to the Graham Review [R1] were accepted and used as a basis for changes to Government policy on pre-packs. The results of the research led the Graham Review to make recommendations around how connected party pre-pack sales were conducted, including how the business should be valued and marketed [C1]. The recommendations were accepted by the Government and the profession and led to a new Statement of Insolvency Practice 16 and the creation of the Pre-Pack Pool [C2].
The main problems identified by the research surrounded the practice of selling a business to its management team in a pre-packaged administration whereby the process lacked transparency. Based upon the findings of the research, the Graham Review recommended a number of best practice actions, which would be available on a voluntary basis. In light of [F2], the revised Statement of Insolvency Practice 16 (SIP 16) now identifies the main principles of marketing which should be followed in a connected party pre-pack. On the basis of [F3], SIP 16 now requires an independent valuation of businesses in such circumstances. In order to address the concern highlighted in [F5] that many connected party pre-packs lead to an early failure by the purchaser Newco, the introduction of the Pre-Pack Pool was suggested and adopted. The Pre-Pack Pool is available for purchasers to approach on a voluntary basis for an opinion as the reasonableness of the sale. It may also be asked to opine on the viability of Newco’s business plan which addresses [F4]. Each of the principal findings of the research are addressed by the Graham recommendations. Graham explicitly favoured no action on purchases using deferred consideration as the research showed statistically that this was not significant in identifying business survival [F6].
The significance of the research is further evidenced by, for example, it being widely referred to in associated House of Commons Standard Notes and Research Briefing Papers [C3 and C4].
Section 129 Small Business, Enterprise and Employment Act 2015 was passed containing a reserve power to restrict administration sales to connected parties. The power lapsed at the end of May 2020 but was re-introduced by section 8 of the Corporate Insolvency and Governance Act 2020. The 2015 provision was stated in Parliament as being based upon the Graham recommendations which, in the same Parliamentary debate [C5], are specifically stated as being based upon the Wolverhampton research [R1].
The Government in its 2020 report Pre-pack sales in administration report [C6] has effectively decided to exercise its reserve power to make reference to the Pre-Pack Pool compulsory. The Government explicitly accepts that “the findings of the Graham Review remain valid”. In deciding whether and, if so, how to exercise the reserve power, the Government carried out its own research whose “quantitative data is broadly comparable with that which was collated … by the University of Wolverhampton, which accompanied the Graham Review.” This is evidence both of the reliability of the research findings and impact but also confirmation of its sound methodology.
Success in the UK has been replicated in Australia.
I2. Impact in Australia
The Graham Review and its underpinning research have been cited by the Australian insolvency practitioner professional body (ARITA) [C7] as well as Australian law reform bodies [C8], including the Productivity Commission’s Inquiry Report no.75 from September 2015 [C9], to argue in favour of or against the introduction of pre-packs in Australia. There is no empirical evidence of such practices anywhere else except in our research and so, in a jurisdiction with much in common with the UK, Australia has adopted the research as evidence for its ongoing policy debate.
The comparative work co-authored by Walton [R2] and [F1] received support for its analysis and conclusion by the Federal Court of Australia [C10].
5. Sources to corroborate the impact
C1. April 2014 Pre-pack research commissioned by the Government which was relied upon by Graham Review of pre-packs – research report [R1] published alongside the Graham Report.
C2. 16 June 2014 - Measures to improve confidence in the insolvency regime – Graham recommendations based upon findings in [R1] all accepted by the Government (Ministerial Written Statement by Jenny Willott MP, Parliamentary Under-Secretary of State for BIS16 June 2014 HC Vol 582 col 69WS).
C3. 04 September 2014 research [R1] referred to by House of Commons Standard Note on Administration Procedure (now see House of Commons Briefing paper: 4915 on Company Administration 2019).
C4. 04 September 2014 research [R1] referred to by House of Commons Standard Note on Pre-Pack Administration (now see House of Commons Briefing Paper: 5035 on Pre-Pack Administration 2019).
C5. Section129 Small Business, Enterprise and Employment Act 2015 was passed by Parliament on 26 March 2015. It was based upon Graham recommendations, which were stated by the Under Secretary for BIS, Jo Swinson MP as drawing upon the research [R1] in the Parliamentary Debate on 04 November 2014 at column 468.
C6. Pre-pack sales in administration report (08 October 2020) (section 2 and section 4.2). The Government’s Corporate report makes specific mention of the research [R1] underpinning the Graham Review and that the Government has effectively replicated the research methodology to understand the current position.
C7. October 2014 Pre-pack research [R1] referred to by the Australian Restructuring Insolvency and Turnaround Association in its discussion paper on distressed companies A Platform for Recovery 2014 Dealing with Corporate Financial Distress in Australia: A Discussion Paper.
C8. Response by Richard Fisher (a former member of the Harmer Law Reform Committee in Australia in 1988) referred extensively to the Graham Review and the research supporting it [R1] in his response to the Australian Government’s Consultation on Reforms to Address Corporate Misuse of the FEG Scheme that ran from 17 May 2017 to 16 June 2017.
C9. Australian Government Productivity Commission Report 75 “Business Set-Up, Transfer and Closure” (2015) pages 387 et seq text to recommendations 14.3 and 14.4 – citing the research underpinning the Graham review [R1] for evidence to support its own recommendations.
C10. Re Ten Network Holdings Ltd [2017] FCA 914, [2017] BPIR 1707 Australian Federal Court, O’Callagan J at paras [17-23]. Numerous references to Wellard and Walton article [R2], which is cited as assessing accurately how an Australian court would deal with an attempt to engage in a UK-style pre-pack.
- Submitting institution
- University of Wolverhampton
- Unit of assessment
- 18 - Law
- Summary impact type
- Legal
- Is this case study continued from a case study submitted in 2014?
- No
1. Summary of the impact
Research carried out by Professor Walton was used in Parliament and by professional and trade bodies to inform a public debate and caused the Government to delay the implementation of its policy on how insolvency litigation should be funded. The Jackson Reforms to Civil Justice in the UK were adopted wholesale by the UK Government. They cut across every area of litigation. Walton’s research argued for an insolvency exception to the Jackson Reforms and received widespread support in Parliament and from business. The research also formed the basis of a very public debate between Walton and Lord Justice Jackson.
2. Underpinning research
The Impact in this case study is underpinned by three reports, which were commissioned by insolvency professional and trade bodies [R1, R2 and R3]. The research underpinning each report uniquely and originally investigated the use of Conditional Fee Agreements (CFAs) and third party funding in insolvency litigation. Parliament passed the Legal Aid, Sentencing and Punishment of Offenders Act (LASPO) in 2012, which adopted the recommendations of Jackson LJ, who had recommended a ban on the recoverability of CFA uplifts. Under a CFA, a claimant’s legal team is only paid if the case is won. In addition to their basic fee, they are also entitled to a percentage uplift on the fee. Prior to the Jackson reforms this uplift, as well as the basic fee, was recoverable by a successful claimant from a losing defendant. The research looked at the likely effect of the Jackson reforms on the unique case of insolvency. No such research had ever been carried out before nor has any such research been carried out by others since.
The research examined the public policy nature of insolvency litigation and argued in favour of the continued use of recoverability of CFA uplifts in such actions. It traced the history of how insolvency litigation had been funded in the past and how it operated in 2014. It identified the unique nature of private insolvency litigation as having a significant public interest.
Uniquely, the research [R1, R2 and R3] includes empirical findings on the use of CFAs and third party funding in insolvency. A major part of the research involved surveys being carried out of the entire insolvency profession to assess how practitioners funded insolvency litigation.
The importance of the research was recognised by the Insolvency Service, which granted Walton access to its records of all the statutory sanctions requests relating to insolvency. This access enabled Walton to create a large database from which it was possible to estimate the annual value of insolvency claims realised by CFAs in 2014 was GBP160,000,000.
The research [R1] produced several Findings [F] and concluded that:
F1. The loss of CFA recoverability in insolvency claims would have a significantly negative impact on the amount of litigation being taken on behalf of creditors and, consequently, advocated a reversal of policy by the Government or at least a delay until other suitable mechanisms could be put in place.
F2. Any alternative funding mechanism, such as that provided by third parties, would reduce the value realised for creditors, and
F3. The loss of CFA recoverability would increase the minimum size of claims being enforced on behalf of creditors.
Jackson LJ’s subsequent public lecture [C8] advocated implementation of his recommendations without any exceptions. An updated research report [R2] was produced by Walton over the end of 2015 and the beginning of 2016. It found that the annual value of claims being pursued by CFA-backed insolvency litigation had risen to GBP1,000,000,000.
The third report [R3] by Walton in 2020 provides evidence that the main findings in [R1] have proved to be correct with a reduction in the value of CFA-backed claims being pursued (down to GBP800,000,000) [F1] and less value reaching creditors [F2] with only relatively large claims being pursued [F3].
3. References to the research
The following research outputs were authored by Walton. Each is a substantial research report of over 20,000 words in length and have been through a rigorous peer-review process. Each has been positively received and widely supported by their respective professional funders. R1 received the practical support of the Insolvency Service and has been the subject of Parliamentary and judicial debates.
R1. The Likely Effect of the Jackson Reforms on Insolvency Litigation – an Empirical Investigation R3 (Association of Business Recovery Professionals) (with the support of the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants in England and Wales (ICAEW), Institute of Chartered Accountants of Scotland (ICAS), the Insolvency Practitioners Association (IPA), JLT Specialty Ltd, Moon Beever and Moore Stephens LLP) (April 2014). (REF 2 Output)
The above report was favourably received by the insolvency professional and trade bodies. Walton disseminated his findings at a number of conferences both within the UK and abroad (Insolvency Practitioners’ Association Annual Conference May 2013, ICAEW Annual Conference June 2013, R3 London Conference September 2013, INSOL International conference March 2014 Hong Kong, R3 London Conference April 2015).
R2. Insolvency Litigation and the Jackson Reforms – An Update R3 (with the support of ACCA, ICAEW, ICAS, the Insolvency Lawyers’ Association (ILA), AUA Insolvency Risk Services Ltd, JLT Specialty Ltd, Willis Taylor Watson) (April 2016).
R3. Insolvency Litigation Funding – in the best interests of creditors? (with the support of Manolete Partners plc, ICAEW and IPA) (April 2020). The main UK insolvency-specific third party funder (Manolete Partners plc), with the support of the principal insolvency professional bodies, commissioned a further update report by Walton in 2019. The effect of the Jackson reforms on insolvency litigation remains a significant policy issue relevant in every insolvency. The results show that CFA-backed insolvency litigation has diminished by 20% and that less money is nowadays returned to creditors than before the Jackson reforms. The results support the conclusions reached by R1 and R2.
In each case, the research underpinning R1, R2 and R3 was conducted with the regular and rigorous guidance of different groups of experienced professional practitioners including judges.
Grants
R3 Association of Business Recovery Professionals, GBP22,091, for a Research Project on the Jackson Reforms.
Manolete Partners Plc, GBP16,667, for Analysis of Insolvency Litigation Funding.
4. Details of the impact
The impact has been materially to change Government policy in its support of the Jackson reforms in the context of insolvency litigation and to inform a public debate, a process that has continued right up until the present.
The research was recognised and supported by significant stakeholder groups; by Parliamentarians and ultimately by the Government of the day. The research examines how best to fund legal actions to return up to GBP1,000,000,000 of creditors’ money per annum. It affects the financial interests of every creditor of an insolvent company or debtor. It argued for an insolvency exception to the Jackson reforms which the Government initially put into effect. Despite a later Government reversal of policy, the research continues to inform persistent representations by the legal and insurance sectors for the retraction of the reversion.
I1. Impact – Informing the Public Debate
The research [R1], [R2] and [R3] was sponsored by the insolvency profession. Support from stakeholder groups for the recommendations in the first report ([R1]) was overwhelming [F1-3]. Support was provided in letters to various ministers (signed on behalf of many professional and trade bodies including R3, ACCA, ICAEW, ICAS, IPA, ILA, FSB, Bar Council, ABI, BPF and CIM ([C1, C6 and C10]).
The research impact to the effective administering of justice in the context of insolvency litigation was thereby recognised explicitly by all of these bodies, each of which has experience and knowledge of how the system operates. They are all major stakeholders in insolvency litigation and all supported the research.
The value of the research was recognised by the then Under Secretary for BIS, Jo Swinson MP, in a letter to Walton dated 08 December 2014 [C3]. The research was referred to on numerous occasions in ministerial questions (e.g. [C2]) and was the subject of two well-supported Early Day Motions [C4 and C9].
I2. Impact – Change of Government Policy
The Government changed its policy on the basis of the research findings [F1-3]. It can be seen that the insolvency exception to the Jackson reforms was extended as a direct result of efforts highlighting the research. These culminated in January 2015 with the first Early Day Motion [C4] and the Parliamentary debate [C5] where the Minister agreed to an urgent meeting with the R3 Policy Group after discussing the findings of the research. A further letter to the Justice Secretary dated 23 February 2015 [C6] was swiftly followed by the announcement of the Government’s change of policy very shortly thereafter on 26 February 2015 [C7].
The research had led to a change of Government policy making the return of up to GBP1,000,000,000 of creditors’ money in insolvencies per annum far more likely.
I3. Impact – Government Policy Reverts
In October 2015 Walton met with Ministry of Justice officials. The second update report [R2] had been commissioned by then.
Jackson LJ, who did not favour any exception to his reforms to all civil litigation devoted his entire Mustill lecture in October 2015 [C8] to arguing why the research findings should not be acted upon.
The update report [R2] continued the public debate by addressing the points made by Jackson LJ in his Mustill lecture. It was published in April 2016 but came too late to influence the Government’s decision in December 2015 to revert to its original policy and to end the insolvency exemption from the Jackson reforms without explanation or further discussion.
Walton subsequently met with the Ministry of Justice in July 2016 where he was informed that although the accuracy of the research was not disputed, the Ministry was not able, as a matter of policy decided by the then Secretary of State, to recognise it.
Walton’s findings and impact within the sector are further underlined by the Manolete Report [R3], where the veracity and authority of [R1] and [R2] have been supported.
Impact – Summary
Evidence informed a very public debate [I1] on a most significant and practical problem affecting at least GBP1,000,000,000 of creditor money each year. The Government was persuaded to alter its policy [I2] albeit only temporarily. The public debate continued [I3]. The insolvency profession had an additional year to prepare for the Jackson reforms. This led to a further year’s increased returns to insolvent estates which was brought to an end by the Government in 2016.
5. Sources to corroborate the impact
C1. 15 October 2014 a letter was sent to the Prime Minister, signed on behalf of representative professional and trade bodies (ICAEW, ACCA, ICAS, R3, the Institute of Credit Management (ICM) and the British Property Federation (BPF)), which called for a change in Government policy based upon the findings and recommendations made in Professor Walton’s Report [I1]. Saved as PDF.
C2. 04 November 2014 Parliamentary Debate on the Small Business, Enterprise and Employment Bill the report by Professor Walton was cited in support by the Shadow Minister for BIS (Toby Perkins MP). The Under Secretary for BIS, Jo Swinson MP, referred to the same report in response [I1].
C3. 08 December 2014 letter to Professor Walton from Under Secretary for BIS, Jo Swinson MP valuing research [I1]. Saved as PDF.
C4. 8 January 2015 Early Day Motion 673 - 69 signatories from across the political spectrum including: Toby Perkins MP (Lab), then Shadow Minister for BIS; the Rt Hon Jeremy Corbyn MP (Lab), then member of the House of Commons Justice Committee and Henry Bellingham MP (Con), former Shadow Justice Minister and former Shadow Trade and Industry Minister [I1], [I2].
C5. 21 January 2015 references in Hansard to the results of the research leading to Government minister, Baroness Neville-Rolfe, agreeing to urgent meeting noting “concerns that litigation brought on behalf of insolvent estates has some differences in principle to other types of litigation [and] … concerns about the potential impacts on litigation practice on behalf of insolvent estates” – reference to “independent research” highlighting Government policy putting at risk GBP160,000,000 and to October letter (see above) to Prime Minister Column GC375 et seq [I2].
C6. 23 February 2015 letter to Chris Grayling MP, then Secretary of State for Justice, referring to the early day motion [C4] and research report [R1], signed on behalf of representative professional and trade bodies (ICAEW, ACCA, ICAS, R3, ICM, the Federation of Small Businesses (FSB) and BPF) [I1], [I2]. Saved as PDF.
C7. 26 February 2015 Government announces change of policy – statement by Mr Shailesh Vara MP Under Secretary of State for Justice 26 Feb 2015: Column 29WS [I2].
C8. 16 October 2015 Mustill lecture by Jackson LJ entitled The Civil Justice Reforms and Whether Insolvency Litigation Should be Exempt delivered by Jackson LJ on 16 October 2015 (‘Mustill Lecture’) – at paragraph 4.4 “Relevance of Walton Report. Those who support a continuation of the insolvency exemption rely heavily upon the Walton Report. R3 make extensive reference to that report in their literature. R3’s counsel summarised and relied upon the Walton Report in their written submissions to the Supreme Court in Lawrence v Fen Tigers Ltd (No. 3) [2015] UKSC 50; [2015] 1 WLR 3485. The Bar Council has also pressed for an extension of the insolvency exemption, again citing the research of Professor Walton as support for its case. In those circumstances, I shall pay close attention to the Walton Report in explaining the four reasons why – with the utmost respect – I disagree with R3, the Bar Council and many other campaigners on this issue.” [I3].
https://www.judiciary.gov.uk/wp-content/uploads/2015/10/mustill-jackson-lj.pdf.
C9. 18 November 2015 Early Day Motion 732 - 28 signatories again from across the political spectrum including: Scottish and Welsh Nationalists, MPs from Northern Ireland, and Caroline Lucas MP, Leader of the Green Party [I1].
C10. 20 November 2015 letter to Michael Gove MP, Secretary of State for Justice signed by R3, Federation of Small Businesses, Bar Council, Association of British Insurers, British Property Federation, Chartered Institute of Credit Management, ICAEW, ICAS, IPA and ACCA [I1]. Saved as PDF.