The insolvency industry has been under pressure for some time regarding pre-packs. They are the practice of agreeing the sale of a troubled company’s business or assets, in advance of administration, often to a connected party.
One of the main objectives with pre-packs is to rescue businesses and equally importantly preserve jobs. Both are of paramount importance particularly in the current economic climate.
However, unsecured creditors often see what they perceive to be a sale of the assets taking place without creditor knowledge for a fraction of the original worth. They understandably feel it would be much more transparent if the assets were offered to the creditors. This is instead of, what is often seen, as an underhand sale “cheap” to the directors or previous owners leaving creditors with little or no dividend.
In reality, this often isn’t a practical option. Some businesses have few tangible assets but have significant goodwill, which can simply evaporate if word gets out. Therefore the business collapses and takes the jobs with it.
In other cases the assets are specialist or perishable and only have a limited appeal to purchasers. There are instances too where the cost of moving heavy plant exceeds its value.
In a previous existence I owned a cleaning business and was an unsecured creditor when a hotel which I cleaned went through a pre-pack. Whilst it did not bring my business down it was a severe body blow – the impact on cash flow and profit. However, what many creditors initially overlook is the loss of turnover moving forward. In my case I was more than happy to work for the new company (on a pro forma basis!) rather than lose the future business on top of the bad debt I had sustained. And there were 18 part time jobs at risk at that location.
Next year may see some changes in legislation. It is proposed administrators be required to give creditors three days’ notice of the pre-pack. The risk is that notification of creditors will increase the likelihood of customers cancelling contracts, staff leaving and suppliers withholding their goods. So effectively many businesses would vanish before a sale takes place. A change in legislation looks likely but a balance needs reaching or we could end up throwing the baby out with the bathwater.