There are many myths surrounding the pre-pack administration of limited companies, mainly concerning the rip-off they represent to creditors and the apparent ‘Phoenix’ like recovery of the new business that comes out of the pre-pack. There are peripheral issues such as the apparently limitless fees charged by accountants and lawyers putting such deals together however these are on the whole regulated by their professional governing bodies and just appear huge to the uninitiated.
It is true that there have been cases especially in the early days of pre-packs when so called ‘sweetheart’ deals were done between the directors of the failed company and the insolvency practitioners administering the pre-pack so that it appeared for a while that the Phoenix company syndrome had come back to haunt us. However I believe that such deals were rare and the external perception of pre-pack arrangements was probably distorted by observers not knowing the full story and jumping to the wrong conclusions.
The hard truth is that if a company is insolvent then by definition it does not have enough money to pay its creditors and some creditors if not all of them will lose what they are owed and therefore there are bound to be some unhappy people as a consequence. they tend to be the ones who then criticise the professionals involved and create some of the myths I refer to.
The purpose of the pre-pack is to try to salvage something from the wreckage that inevitably follows such situations. The Administrator is (broadly speaking) under a duty to preserve the company’s assets, collect in whatever cash they can, sell assets for the best possible price and return the proceeds in the correct order of preference to the creditors. However if there is the possibility of selling a good part of the business as a going concern whilst leaving behind the debts that have brought the company down and in doing so preserving the jobs of some of the staff and some of the accumulated goodwill and possibly know-how and assets built up over many years trading then the Administrator also has a duty to try to do this. The pre-pack system allows such deals to be done in anticipation of the company going into administration rather than in the chaos that generally reigns after it has happened.
Pre-packs are not a perfect solution but in a less than perfect world where companies do go bust leaving creditors unpaid it is a widely used mechanism for salvaging what can be salvaged from failing or failed businesses. Like all things the dishonest actions of a few can taint the generally perfectly honest intentions of the majority. 2012 is likely to see a resurgence of pre-packs so we expect to be busy. Call us on 0844 209 8500 or email us on enquiries@future-law.co.uk to discuss how we can help you.
Guy Bottard 30/12/2011
