Transparency on ‘pre-packs’ is overdue

SO-CALLED “pre-pack” administrations, under which insolvent businesses are immediately sold back to the same owners, have – quite understandably – given the entire administration process a bad name.

Those owned money by the company are often left out of pocket while the directors who presided over the company’s collapse are able to carry on in the same line of business, which many creditors regard as insult being added to injury.

Nor is the loss necessarily confined to other businesses. While many creditors will be trade suppliers which have provided a product or service for which they have yet to be paid, their ranks can also include customers who have paid for a product or service they have yet to receive.

Undoubtedly, the system has sometimes been used by unscrupulous directors to run up liabilities which they have no intention of honouring, and then to start off the process all over again.

However, it is important to remember that such cases only account for a small minority of company failures and that in most cases the directors have acted entirely in good faith. Indeed, insolvency is often the result of factors entirely outside the company’s control and no genuine blame at all can be attached to its directors, who may also be among the biggest financial losers.

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Equally, it must be remembered that the reason behind the present approach to corporate insolvency is that administration offers a much greater chance of a business surviving as a going concern – and with it the jobs of all those who work for it – than was previously the case under the process of receivership.

Now, at last, there are plans to reform administration which, it is to be hoped, will address the worst abuses of the system without throwing the baby out with the bath water.

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The signs are encouraging. The proposal is that in the case of a “pre-pack”, where a business is marketed and a sale agreed in advance of administration (which does not necessarily mean a sale to the existing owners) creditors should be given three days to object. At present, such deals can be done in a matter of hours without creditors having the opportunity for any say in the matter.

At the very least this should make the process more transparent and create a greater sense of confidence that the deal is in the best interests of the greater good, even if that is cold comfort for creditors. It is also to be hoped that the greater scope for scrutiny will discourage some of the more questionable deals from being done in the first place.

However, it remains to be seen whether this will be the case, and whether it will be achieved without a negative impact on legitimate rescue efforts.

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