2 November 2009

Are pre pack administrations a fair way to rescue failed businesses? As the economy continues to slip and slide more businesses are likely to fail in the coming months and years. The concept of a pre pack administration is to complete a complex financial restructuring with minimal adverse effect. Without doubt speed is important in dealing with any insolvent position in order to protect as much as possible but have we gone too far down this road with loopholes being exploited by unscrupulous individuals?

Where a protracted public sales process could damage the business, its reputation and consumer confidence then there has to be an argument for the pre pack as negative publicity can lead to a cash hemorrhage and significant job losses. But how common is this and does this concept still hold water with smaller or niche companies?

The law – whilst now strengthened with the introduction of SIP 16 for insolvency practitioners – is still open to abuse and has too many loopholes. Perhaps we should be asking why a business may not survive and once we understand this then the issue of a pre pack becomes much clearer. There are two key elements to survival – cash and good management. If a company has enough cash then a pre pack is unnecessary and if the management fails then it must be wrong to organise a pre pack with the same managers still in place!

Too often the losers in a pre pack are the small creditors who are forced into acceptance of a poor deal by bigger players and the fear of losing everything. Where the new owner is the original one there must be some mechanism whereby future profits are subject to a “pre pack” tax over and above normal taxation and which gets distributed to those who lose out under the original agreement. Otherwise everyone may as well dump their debt burden and undergo a pre pack.

I still believe in integrity, honesty and fairness in business dealings and pre packs fail to pass these tests in too many cases.

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