A controversial technique, used to save struggling businesses by the insolvency industry, rescues more jobs than traditional methods.

‘Pre-packs’, where a deal is struck to sell an insolvent company’s assets before it enters insolvency, preserve more jobs than other types of process, according to preliminary analysis by R3.

The report found that 92% of pre-packs resulted in a 100% transfer rate of employees to new owners, compared with 65% in other types of sale following insolvency.

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.

Though the industry has praised their efficiency in certain circumstances, some cases such as the recent Leeds United arrangements have drawn stinging criticism.

Practitioners, in particular, have argued that where people-businesses, which trade on their reputation, are concerned, a quick administration is essential.

The report also found that pre-packs have been used more frequently by practitioners since the introduction of the Enterprise Act 2002, which looked to encourage the rescue of more businesses.

Philip Long, PKF head of corporate recovery, said the pre-pack was a useful ‘tool’. But where the system was abused, for example when a practitioner inappropriately helped to sell a business back to its original owners free of debts without considering marketing the business, then regulators must step in.

‘The process is right, but when it’s abused, we need to make sure things are picked up and there is regulatory involvement,’ said Long.

Sandra Frisby, a company and commercial law lecturer at the University of Nottingham who wrote the research, said practitioners’ use of pre-packs was heavily regulated.

Tony Murphy, recovery and restructuring director at Smith & Williamson, has argued that there could be a massive negative impact on jobs if pre-packs were banned.

‘If pre-packs were banned then you would see more liquidations,’ said Murphy. ‘What if the business is making a loss? You can’t sell, then all you can do is liquidate. Unless it was viable as a profit-making sale you limit your alternatives.’