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Why Pre-pack Administrations are bad for business

Posted by Michael under Business Growth, Entrepreneur Resources

A pre-pack administration can sound like the ideal answer for a failing business, but is it really such a great solution for the business, and for the economy?

What is a pre-pack?

A pre-pack administration is a package that allows for the selling the assets of a company immediately after it has entered administration. In many cases, the previous directors or management purchase the assets of the company from the administrator and set up a new company. In a recent example, directors of Kiss Travel which collapsed in August, had bought assets from another travel company, XL Leisure group, which folded back in 2008, and which at least one director of Kiss had also been involved with at board level. The intention is to allow the administrator realise the greatest possible amount for the assets because the asset buying process allows for business continuity and the goodwill inherent in the company is both preserved and transferred. It is often the case that some or all of employees of the company transfer  to the new company, thus preserving jobs.

Why pre-pack should cease

The pre-pack system has rightly attracted criticism because it allows companies to continued without their creditors which gives, at very least, an appearance of failing to meet the minimum standards of business ethics. As a result, SIP 16 was introduced in 2009 to assist Insolvency Practitioners in pre-pack cases. It was designed to make the process more transparent to creditors and to ensure that fair value was obtained for the assets. However, from my personal experience, the opposite has happened because the pre-pack process removes any competitive activity around the assets being sold, because there is no scope for anybody outside the company to compete to buy them.

Pre-packs in retreat

In KBB, the trade magazine for the kitchen, bedroom and bathroom trade Danielle McCormick, a retail solicitor, has a different but equally uncomfortable view of pre-packs. She describes the pre-pack as a diet pill allowing failing companies ‘… to trim down on the unwanted calories in order to fit into next season’s mini, or ‘newco’ (new company)’.

But she points out those left in its wake are now fighting back.

1.  Landlords have won recent cases in which administrators of collapsed retailers were ordered to pay rent quarterly in advance, rather than paying rent weekly – clearly the latter gave them a massive advantage on potential outlay and cash flow. 

2. Banks are starting to reject pre-pack processes too – and because a pre-pack requires the agreement of the company’s main banker, this tougher line can stop pre-packs in their tracks.

3. Finally, HM Revenue and Customs appear to be intervening, they have apparently begun to ask for a winding up petition in some cases, rather than becoming an unpaid creditor following a pre-pack.

Pre-packs can be serial disasters

MPs have expressed concerns that it inadequately run businesses can avoid not only paying their debts, but the tax burden that should support the economy’s growth. For competitors it’s an even worse scenario – badly-run, failing, debt-laden and uncompetitive businesses are able to suddenly ditch their debts and return with a huge competitive advantage against competitors. This serial failure behaviour then adds to the pressure on financially sound and well-run businesses who are forced to compete against a pre-pack phoenix in a recession economy. The pre-pack process also prevents failing businesses being acquired by better-run and well-managed competitors

It is not right and the process needs to change.

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