Phil MeekinView Profile
R3 is the Association of Business Recovery Professionals and is the UK’s leading trade association for insolvency, business recovery and turnaround specialists. The association represents 97% of licensed insolvency practitioners. It also promotes best practice for professionals working with financially troubled individuals and businesses. 92% of pre-packs have resulted in a 100% transfer rate of employees to new owners and are much more likely to preserve jobs. Much higher than the 65% in other types of sale following insolvency.
Pre-packs are receiving greater attention in the media than ever before. There is an expectation that such cases will rise in line with general company insolvencies. Sometimes a controversial technique, pre-pack is used to save struggling businesses by the insolvency industry and can rescue more jobs than traditional methods.
What is a pre-pack?
A pre-pack is a deal for the sale of an insolvent company’s business or assets, put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business is often worked out before the insolvency practitioner is formally appointed. Afterwards, the process is rapidly executed.
The business is usually sold with little or no open marketing. So unsecured creditors are usually not informed of the pre-pack until after it has been completed. Secured creditors will often be aware of the transaction as they will generally be required to release their security.
Criticism of pre-pack
Pre-packs have been criticised for being a ‘stitch-up’. Businesses can write off debts owed to creditors through the arrangements, with the new owners sometimes the same as the old owners.
Practitioners, in particular, have argued that where people-based businesses, which trade on their reputation, are concerned, a quick administration is essential. This type of procedure has been used more frequently by practitioners since the introduction of the Enterprise Act 2002. This act looked to encourage the rescue of more businesses. It’s important to remember insolvency practitioners’ use of pre-packs is heavily regulated. It’s been argued that there could be a massive negative impact on jobs if pre-packs were banned, resulting in more liquidations. If a business is making a loss and it can’t be sold, then all you can do is liquidate. Unless it was viable as a profit-making sale, alternatives are limited.
Pre-pack liquidation and pre-pack administration allows the sale of a company’s assets before undergoing an insolvency process. Afterwards, debts can be written off, and the business can continue in a new limited company. While there has been criticism of these practices for ‘allowing businesses to get out of paying their debts’, insolvency practitioners argue it saves a lot of companies from straight-up liquidation.