Pre-packs overtake normal administrations

Are pre-packs about to come in for another pasting when the government
releases figures on the controversial process next month?

The fur could fly because IPs have said pre-packaged administrations are
becoming the first choice option in a climate where vital trading funds have
dried up and market reactions see company values drop severely.

Pre-pack deals secure a buyer before entering administration and aim to save
a company from the burden of continued trading in a climate when there is little
access to the cash needed to keep the business going.

The government is so concerned about the lack of funds, it has even floated
proposals to amend insolvency laws, making it more attractive to lend to
companies involved in company voluntary arrangements or already in
administration.

Nick Hood, of Begbies Traynor, said pre-packs had overtaken conventional
administrations for companies with a genuine chance of avoiding liquidation.

‘The answer is yes. In fact, they already are. This is in the case of
administrations being used as a genuine rescue tool as opposed to the
unfortunate number of administrations that are simply a short cut to
liquidation.’

In response to the government’s plans, Frank Simms, the new president of the
Insolvency Practitioners Association, said the number of pre–packs had shot up
and the rule changes were vital if the traditional administrations were to make
a comeback. He says: ‘The absence of funding is one of the factors driving up
the number of pre-packs and, while we support the pre-pack process, this will
help to give practitioners other options.’

Simms, an IP for 45 years specialising in business recovery, an active member
of Insol Europe and R3 Council member, added: ‘Funding in these cases is vital
if practitioners are to have the breathing space to trade and sell businesses,’
he said.

Pre-packs have been panned by politicians, unions and suppliers concerned
that unsecured creditors get a raw deal because the process takes place behind
closed doors, unlike a traditional administration.

However, last month, brewer Cobra Beer was saved from going under after
administrators from PricewaterhouseCoopers sold the ailing brewer to Molson
Coors in a pre-packaged deal.

‘Funding for ongoing trading has dried up,’ Hood added. ‘The risks for
ongoing trading are incredibly high.

If the business was struggling before, competitors then pick off the best
talent, suppliers get tougher about credit terms, customers desert to a safer
competitors and the price of the company also tanks.’?