Across the globe, attitudes and experiences have made the pre-pack process a hot topic. Jock, Rocky and Stuart brought views from their respective regions to the table with:
- Australia having strict regulations and encouraging creditors to object to any deals they feel are unlawful;
- India’s court overseeing the pre-pack schemes and;
- recently the UK having introduced an advisory body to deal with all cases.
What is a pre-pack and why are they disliked so much?
When a company enters administration, its assets are usually sold on the open market or at auction. In a pre-pack, the sale of assets is pre-arranged, and this arrangement can be with the previous owner(s) / director(s) of the insolvent company, who will be able to purchase some or all the assets and transfer them to a newly formed company.
So, why are pre-packs disliked so much? The first thought which often crosses many people’s minds is a common perception of abuse, where a company will enter a pre-pack agreement and then the old directors will form a new company and buy the old one to avoid paying creditors, often leaving the creditor high and dry with unpaid debts, allowing them to start again.
While this may not be the intention of the directors, it is often perceived as an easy way out or a way to start again debt-free. A perceived lack of transparency by the Insolvency Practitioner (IP) to unsecured creditors often results in the creditor feeling isolated and suspicious of the process, because the creditor is often not informed of the pre-pack until after it has been completed. Creditors will also have a concern that the best value isn’t being achieved for the business due to the speed pre-packs are usually put together.
Pre-packs – a useful and valid insolvency tool
Despite these criticisms and the negative press, it is recognised that pre-packs are a useful and valid insolvency tool that can provide the best outcome for all concerned in appropriate circumstances. It offers value protection with the risk of value diminution avoided by a completed sale before insolvency news reaches the marketplace, along with reducing costs to administrators. And probably the biggest advantage of a pre-pack is the prevention of job losses, particularly during the current tough economic times, as the company is often picked up before redundancies or cost-cutting takes place.
Are pre-packs here to stay?
In short yes, with it fast becoming the choice procedure to save a failing business with a fast and efficient sale.
Watch the full discussion here about pre-packs hosted by Peter with fascinating contributions from Jock Baird, Rocky Ravinder Gupta and Stuart Hopewell.