Motaquip’s Peter Cox discusses the advantages and disadvantages of a pre-pack deal

Andrew Page was one of the most notable examples of pre-pack administration in recent times

A ‘pre-pack’ admin is when directors of an insolvent company prepare a sale of all or part of the business or assets before an administrator is appointed, but often with their support.

The negotiated, pre-arranged sale occurs immediately, or shortly after, the appointment of the administrator. They’re increasingly common, and a quick Google search will find many companies advertising such services and touting pre-packs to failing businesses.

How you feel about a particular pre-pack depends on who you are. Secured creditors have to be informed about the company’s plans, are more likely to be involved in the new business and pre-packs consequently can appear biased in their favour.

Unsecured creditors presented with a fait accompli often feel aggrieved that they have been denied a vote on the proposed sale of the business or assets. They feel a pre-pack fails to expose the business to competitive market forces, and, as such, best value for them is denied.

Now, while there is evidence that jobs can be saved by acting quickly and minimising damage with a pre-pack, and, on average, secured creditors also do better, unsecured creditors are normally worse off.

The more contentious forms of pre-pack are those where directors of the failing company set up a new ‘phoenix’ business, often with the same owners in charge. The new company buys the assets of the old business, often retaining suppliers and customers with whom continuity of trading can be achieved, but is able to leave debts and other things (such as unfavourable lease agreements or contracts) in the old company. This is then liquidated.

It is completely understandable that creditors, particularly those who are unsecured, feel very aggrieved to see the directors they hold responsible for their losses ‘swanning off’ and able to start again with mess and consequences behind them.

The use of pre-packs has grown significantly over recent years, and they have courted more controversy than any other form of insolvency practice. The government has very recently reviewed the practice of pre-packs, but has not brought any new measures in to regulate the practice despite heavy pressure from some quarters.In January 2009 the government did act and introduced a new process, the Statement of Insolvency Practice 16 (SIP 16), to try and combat some of the criticisms surrounding pre-packs and add transparency.

It requires Insolvency Practitioners (IP) to detail and make available to creditors and government ‘sufficient’ information on the decision-making process to allow them to understand the circumstances under which a pre-pack was considered the best option.

It also requires the IP to lay out the relationships and connections between the old company and the new phoenix. Judging by the on-going criticisms pre-packs attract, it’s fair to say there is some way to go in gaining support for this approach to failing businesses.

It is clear that there is nothing illegal in a properly administered pre-pack, but many see them as morally wrong. There will always be victims in a business failure, but in a pre-pack those most responsible can often walk away least affected.

Published by Darrenmoss

CAT magazine's in-house reporter and self-confessed petrol head

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