As an insolvency practitioner (IP), we have an obligation to maximise the returns to creditors and all decisions in relation to the future of the business in question are made with the needs of the creditor at the forefront of their minds. Almost without exception, a pre-pack maximises the returns to both secured and unsecured creditors. Creditors also have the opportunity to decide whether they will trade with the new company and, if so, on what basis. Pre-packs have also been shown to result in a reduced number of creditor claims, as many of the key agreements (property leases, operating leases and business rates) can be ‘rolled over' into the new company.
Deciding on the best outcome
Pre-packs are not a premeditated means to avoid business failure. Businesses, like people, are unique and IPs must therefore explore all the options available, factoring in a number of issues before deciding on the best outcome.
In particular, IPs will assess whether a ‘turnaround' is possible, using a combination of restructuring and refinancing to address the key business problems. They will also look at the ownership of the business assets, whether the directors or owners have any appetite to continue and, where a change is required, the likelihood of a buyer being found.
Once the facts are clear, IPs have a number of options open to them: the liquidation of the business; a Company Voluntary Agreement (CVA); or the administration process (of which a pre-pack is just one option). Should administration be the logical solution, the assets will be independently valued and the business actively marketed for sale (as required under the Statement of Insolvency Practice 16) to ensure the best price is secured and the most appropriate buyer found. This is crucial, especially if the business relies on a few key individuals as the most appropriate buyer may be part, or all, of the existing management team.
A single business collapse can have a much wider repercussion as one business failure can create a domino effect that negatively impacts on suppliers and smaller businesses. One example of this is the knock-on effect that the collapse of Woolworths had on music retailer Zavvi at the end of 2008 - they both shared the same supplier.
A pre-pack deal can reduce the likelihood of subsequent failures of associated businesses - suppliers, customers or creditors. The continuation means suppliers still have a potential source of income while creditors are also protected. Similarly, pre-packs often see some, if not all, employees retained by the new company which both limits unemployment and, due to the reduction in preferential claims from secured creditors (for redundancy packages), can give an enhanced dividend to unsecured creditors.
To give businesses the best chance of survival, pre-packs need to be conducted efficiently. Often, there is no time to make information public and doing so could damage the long-term prospects and success of the insolvency process.
It is likely that current scrutiny of the process will continue, but criticism comes more from a lack of knowledge about the process than the abuse of this type of practice.
Pre-packs will remain a key component in an IP's toolkit and will continue to be used in cases where it offers the best outcome for creditors.
Carl Jackson is the national head of Tenon Recovery and an executive director of Tenon Group, a group that specialises in advising entrepreneurs
Pre-packs maximise returns and offer a valuable alternative to redundancies
There's been a lively debate on the use of pre-packs as part of an administrator's toolkit in recent months. The impact of the Credit Crunch and recession has seen a dramatic rise in the number of 'distressed' businesses and, as a result, pre-packs have come under the spotlight. Critics have brought into question the interests of creditors and highlighted concerns over the apparent lack of transparency. As a result, the government has stepped in to assess the validity of these claims.
