Phil MeekinView Profile
The current economic climate has seen a growth in businesses being pre-packed with administration or liquidation.
In simple terms, in a “pre-pack” a buyer is lined up for a struggling business before it goes into administration or liquidation.
Why would a business pre-pack?
It is invariably an option taken when all others have been exhausted. A common situation is where a business is carrying historical debt which it can no longer afford to service. The core business may well be still viable, and of course, if peoples’ jobs are on the line, it may be judged to be appropriate to pre-pack.
In many cases, the existing business owners form a new company, known as a phoenix company, they, in turn, buys the assets of from the old company, which is then liquidated and the owners move on to the new company. Staff can also make the transition across to the new company, as insolvency practitioners will look to keep employees in jobs.
Is pre-pack ethical?
There are those who feel this is morally wrong, but there are always differing viewpoints. The procedure of a pre-pack administration or pre-pack liquidation, is perfectly legal but has to be arranged within strict guidelines. The Court appoints administrators, and as with many things in life, there are winners and losers. A topical case was the sale of the assets of Cobra Beer to Coors, immediately after Cobra Beer entered administration. In that case, the assets were sold to a new company owned by the original owners.
Understandably, such situations can provoke anger among suppliers and landlords, many of whom can be left with unpaid bills. This is very much the downside, as often it is the smaller businesses who end up out of pocket and potentially facing liquidation themselves. However, quite often some, if not all staff get the opportunity keep their jobs.
Tax-payers may question why they should foot the bill for unpaid tax bills, which are often written-off in such arrangements, but that too can be countered with the savings of not paying unemployment benefits. Business owners themselves may have already lost significant amounts. One criticism often raised is that the assets are sold at below market value (which reduces the amount available to pay creditors). However, any sales during a pre-pack or before pre-pack should be looked into by the insolvency practitioner
Looking at the bigger picture, as a nation, we can’t afford for the economy to contract when the climate is still unpredictable – so the more businesses that are saved, the better. In such situations, the administrators, all of whom are licensed insolvency practitioners, work under stringent rules to obtain the best position for creditors of the company.
When a business goes through pre-pack administration or liquidation, the assets are sold to an associated party, which could include personnel, and in some cases, directors from the old company. All debts die with the old company, allowing the business to continue unburdened. It’s often used as a last resort when other options are unsuitable, or debts are too high to warrant them. Some consider pre-packing unethical; allowing the company to get away from its old liabilities with little penalty, and assets are sold at a lower price than their market value. However, the market for these assets is usually small.
At Wilson Field, we employ a team of licensed insolvency practitioners and other professionals; we specialise in business turnaround and always aim to reach the best outcome for you and your business.