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Pre-pack administrations – vital rescue tool or creditor scam?

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With more and more businesses feeling the pinch in tricky economic times, companies are increasingly looking at ways of restructuring.

One of the more controversial options in recent years has been so-called pre-packaged administrations, or ‘pre-packs’.

A pre-pack effectively entails a company being put into administration, and then its business or assets being sold very shortly thereafter pursuant to a pre-arranged deal. Recent examples include well known high street names such as Bonmarche, Blacks and La Senza

Benefits of pre-pack administrations

  • Pre-packs are a quick, and relatively painless, way of rescuing an insolvent company. This in turn keeps insolvency costs to a minimum.
  • Continuity of business – the operation of the business usually continues without much, if any, interruption, helping to preserve any goodwill and value in the business.
  • Job preservation – a continuance of the business helps minimise job losses, and ensure that key contracts are likely to be retained, giving the business a greater chance to recover.

Criticisms of pre-pack administrations

  • They can be carried out with a lack of notice to unsecured creditors (secured creditors must be consent to the sale).
  • By the same token they do not maximise returns for unsecured creditors. This is because it is difficult for the proposed administrator to test the market fully for the best deal as the risk of the company’s financial difficulties being leaked could destroy the value of the business.
  • There is a similarity to ‘phoenix companies’, particularly where the existing management team purchases the business and assets, leaving behind the liabilities. As such there can be a suggestion of asset stripping.

Affected creditors often feel that they have lost out in such circumstances. However, creditors ought not realistically to expect to get their money back from an insolvent company.

Notwithstanding some of the criticisms, the courts have repeatedly upheld the legality of pre-packs as a method of rescuing businesses.

The coalition government, too, have recently spent time looking into pre-packs, and have indicated that they do not see a need to change the rules, with a minister commenting ”pre-pack sales can offer a flexible and speedy means of business rescue and when used appropriately can be the best way of maximising returns for creditors”.

For more information on pre-pack administrations, or any other mergers and acquisitions issue, contact the team on 01772 258321.


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