Pre-pack liquidations and pre-pack administrations are found to preserve more jobs than any other type of insolvency process according to reports published by R3 (R3 is the Association of Business Recovery
Professionals is the UK’s leading trade association for insolvency, business recovery and turnaround specialists in the UK. It represents 97% of licensed Insolvency Practitioners. It 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. This is compared with 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. A controversial technique, it is used to save struggling businesses by the insolvency industry, rescues 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 (and/or assets) which is put in place before the company goes into a formal insolvency process, usually administration. The deal for the sale of the business will usually have been worked out before the insolvency practitioner is formally appointed. It is then rapidly executed once the appointment has been made.
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 usually be aware of the transaction as they will generally be required to release their security.
Pre-packs have been criticised for being a ‘stitch-up’, with some cases having drawn stinging criticism. 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-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.
Insolvency Practitioners’ use of pre-packs is heavily regulated. It has been argued that there could be a massive negative impact on jobs if pre-packs were banned and that this would result 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 you limit your alternatives.