Pre-packs overtake normal administrations

by David Jetuah

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18 Jun 2009

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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.’Ѝ

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