Insolvency experts defend 'pre-packs'

THE regional leader of insolvency trade body R3 has defended the use of controversial “pre-pack” administrations, under which failed businesses are immediately sold back to their owners.

THE regional leader of insolvency trade body R3 has defended the use of controversial “pre-pack” administrations, under which failed businesses are immediately sold back to their owners.

Some creditors have expressed anger after being left out-of-pocket by the collapse of a company, only to see its original owners continuing to carry on the same business.

But Laurence Weeks, R3's eastern region chairman and a partner at Cambridge law firm Taylor Vinters, said yesterday that the “pre-pack” option was widely misunderstood and the benefits often overlooked.

His comments came after research conducted by R3 - which represents 97% of the UK's insolvency practitioners - showed that pre-pack administrations offer the best chance to save jobs.


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In 89 pre-pack cases identified in the research among R3 members, 88% of the jobs at risk were saved.

Other key reasons cited by R3 members for undertaking a pre-pack include the opportunity to avoid liquidation and the need for a fast sale, most likely because rumours of financial difficulties would have destroyed what remained of the business.

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Mr Weeks said: “A pre-pack is a deal for the sale of an insolvent company's assets which is set up before the company enters a formal insolvency process.

“The deal will usually have been agreed before the insolvency practitioner is appointed, but will be executed by the insolvency practitioner shortly after appointment.

“They are a misunderstood insolvency tool, the benefits of which are frequently lost in the debate over their perceived impact on creditors. However, independent research shows that pre-packs fare considerably better than alternatives in terms of the retention of jobs and returns to secured creditors.

“In today's economic climate, with a dearth of buyers and incredibly tight financing, a pre-pack is often the only option left in a large number of cases. Furthermore, the speed with which pre-packs are performed is crucial in maintaining value in a business which would otherwise be diminished once its severe financial difficulties become known to staff and customers.”

In January 2009 the Government's Insolvency Service announced that it would ensure creditors are given sufficient information when a pre-pack is agreed and that it would follow up cases with the regulators if concerns are raised. R3 says its research shows that its members are following the best practice processes for working with creditors, as agreed with the regulators.

Mr Weeks added: “There has never been a recession like the current one. We have not seen the bottom of the market in terms of insolvencies yet, nor are we seeing any significant easing of financing.

“I would therefore urge creditors and the public to give greater recognition to the role of pre-packs in saving jobs and achieving returns for creditors.”

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