‘Quickie’ insolvencies help preserve jobs

'Quickie' insolvencies help preserve jobs

Pre-packs are found to preserve more jobs than any other type of insolvency process according to preliminary analysis by R3

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.’

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