Pre-pack arrangements have been getting a lot of bad press as creditors of companies which are placed into administration suddenly find the business has been sold to a new company with the same directors and shareholders but debt free (72% of pre-packs last year were to connected people).
The government has been looking at ways of regulating these creations of Insolvency Practitioners (IPs) arising out of the Enterprise Act 2002 and commented on in various court cases, but they have placed all the regulations on hold after a large out cry from IPs because some of the new procedures such as making available the proposed price to be paid and a 3 day period between administration and sale. But what are the alternatives?
If the company is insolvent and the directors are required to place it into some insolvency procedure, there are seldom people waiting in the wings to purchase a company in difficulty – it is difficult enough to sell a good company.
So why not sell it to the directors who know the company and are prepared to pay to run it again rather than have no money and they set up another company to do the same thing. Why not save the jobs of the employees?
Research in 2010 by Dr Sandra Frisby of the University of Nottingham showed that secured creditors typically recovered 35% of their debts in pre-packs against 33% on straight business sales (assuming a buyer can be found). So it cannot be a bad commercial idea if one takes the emotion of the unsecured creditors out of the situation.
