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Higgs offer a pre-pack perspective

 

Article date:  01/03/2009

Coffee seller Whittards of Chelsea and fashion chain UCS are just two of the high profile retail businesses which this year alone have been subjected to pre-pack sales out of administration. 

The pre-pack has certainly come of age in 2009 however for the majority of the population the whole concept is relatively unknown.  For those that have encountered them, they provoke strong views.  In recognition of the concerns provoked by their use tighter regulations were introduced last month.

David Ellis, head of business recovery at Higgs & Sons, says that the high profile pre-packs represent just the tip of the iceberg.

He said: "In its simplest form a pre-pack is an arrangement by its proposed administrator to sell an insolvent company's assets which is negotiated before that company goes into administration.  Often the buyer will be a company owned by the directors themselves.

"The creditors will be concerned to find that the purchase price may be well below book value of the assets and the sale will be concluded within minutes of the administrator being appointed by the very directors who are then looking to buy back the business.

"The creditors of the business will typically find that, as unsecured creditors, they are unlikely to receive anything in the insolvency but the directors are apparently still trading the same business with the same assets but none of the liabilities."

As can be expected creditors will often take a sceptical approach to such an arrangement and will argue that the market is rigged in favour of the incumbent directors.

But David said that if used correctly a pre-pack can be an effective tool in saving jobs and reducing creditors' claims.  Often there will be no other potential buyers and the price payable will be above the forced sale value of the assets.  If the buyer also removes some of the liabilities from the company by taking over employees and leases then this can be justified.
He added: "Pre-packs are by no means appropriate for all types of business but in many cases, properly used, they can be shown to maximise realisations and save jobs.

"Creditors are unlikely ever to embrace pre-packs but, with more transparency and rigorous enforcement of the new regulations, they may eventually come to accept them."

David Ellis is a licensed Insolvency Practitioner at Higgs & Sons and heads the insolvency team.  Higgs & Sons has three offices at Brierley Hill,  Stourbridge and Kingswinford.

View all articles for 2009

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