Pre-packs under fire

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.

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