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Pre-packs under fire
Nov 24, 2009
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The increasing use of
pre-pack administrations is attracting much attention and raising a number of
concerns. Earlier this year, a report by the BERR Committee (Department for
Business, Enterprise & Regulatory Reform, formerly the DTI) on the
Insolvency Service stated that prompt, robust and effective action is needed to
ensure that pre-pack administrations are transparent and free from abuse.
The practice of
‘pre-packaging’ the administration process was developed in response to the
need to maintain value and continuity while a business is rescued. In a
pre-pack, the company is put into administration and the business is then sold
very soon after an administrator is appointed. Often the insolvency
practitioner, the directors and the ailing company’s bank will already have
obtained valuations, agreed a price and drafted contracts to enable the
business to be sold in this way.
This approach offers potential benefits to
both creditors and the future purchaser. For example, it can help maintain the
continuity of supply that is essential to keeping customers on-side, ensure
that key employees are retained and enable existing contracts to be supported
and fulfilled so as to avoid disputes. Though pre-packs may be seen as a good
thing by the businesses concerned, they are not always well regarded by those
on the receiving end, typically creditors and bankers. It is a common
perception that assets may have been sold at an undervalued price or that
goodwill has not been fully valued because of the speed of the sale.
Consequently questions are raised over the size of any pot available to
creditors for repayment.
The BERR
Committee reported mounting complaints and unease about the lack of transparency
and potentially reduced returns to unsecured creditors following pre-pack
sales. There were even more concerns in cases where existing management buy
back a business and continue to trade, clear of the original debts.
Partner Simon Brazier
studied law at University College London after three years’ accountancy
training and joined us from a West London practice specialising in
music, film and media. Simon has wide experience of business start-ups,
mergers & acquisitions, reconstructions and joint ventures and a
particular interest in IT, e-commerce and internet related issues. simon.brazier@willans.co.uk