Bank loan squeeze fuelling rise in pre-packs, says IP chief

Critics of pre-packs have claimed that unscrupulous directors are using them
to offload debt and short change unsecured creditors.

Some creditors say they lose out in pre-packs, where a deal is done to sell a
business on the brink of insolvency with the consent of secured creditors. The
company’s assets are sometimes sold at knockdown price while suppliers complain
that their ties with the troubled company may be severed.

According to an industry spokesman, IPs are using pre-packs more often
because it is increasingly difficult to secure funding from banks to keep
struggling companies alive.

David Kerr, chief executive of the
Practitioners Association
, says: ‘In the current climate IPs are looking to
do more pre-packs because they are finding problems securing short-term funding
run the company because of the banking situation.

‘Companies going through pre-packs are already insolvent. The creditors lose
money anyway. If you’re selling the business quickly as a going concern,
suppliers have the opportunity to continue trading with the company.’

The drying up of borrowing facilities was doubly damaging because IPs going
down the conventional administration route had no guarantees that bidders would
be able to secure the funds they needed to buy the struggling company, Kerr

Recent high profile pre-packs have made headlines and increased pressure to
crackdown on pre-packs.
Sir Tom Hunter, the owner of clothing retailer USC, bought the company back from
the administrators but only purchased 43 of the 58 outlets. Officers Club chief
executive David Charlton bought back 118 of its 150 menswear stores, but the
shutters were pulled down on the 32 other sites.

Stephen Speed, head of the Insolvency Service, was due to face some tough
questions from the Business and Enterprise Regulatory Reform committee earlier
this week.

Pre-pack supporters also point to some success stories. Administrators from
& Young
sold Whittard to private equity firm Epic, with no loss of jobs
currently planned from the 130-strong store chain.

Earlier this month the Insolvency Service warned it would clamp down on
directors who may be abusing the process and SIP16 makes provision for licensing
bodies to come down hard if they believe the IPs have not met the required

But, given that the Business and Enterprise Regulatory Reform can only
recommend reforms to pre-packs, or even a change in legislation, pre-packs are
set to increase this year as the recession deepens.

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