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Why we need a fairer deal from pre-packs    

Pre-pack administrations – where a company enters administration one minute only to be sold to a pre-arranged buyer the next – are surrounded by controversy.

Pre-pack administrations – where a company enters administration one minute only to be sold to a pre-arranged buyer the next – are surrounded by controversy.

Opponents say they can lead to ‘off-the-market’ deals favouring the buyer, rather than creditors. They argue that trading an insolvent business while seeking competitive bids for its assets (as with Peacocks), is the way to optimise value.

However, supporters say it’s better to line up a buyer and agree an offer for the business before administration, as happened with Bonmarché and Blacks Leisure.

In reality, the cases are very different: Peacocks entered administration without being pre-packed because of the unexpected failure of talks to refinance the business, whereas Blacks had been targeted as a purchase by Sports Direct and JD Sports among others, suggesting the best deal had been reached before pre-pack.

It’s true that a long period of administration can undermine a business – suppliers stop supplying, people leave – the administrator can be left with nothing to sell.

When a long administration would destroy remaining value, a pre-pack can be appropriate.

However, this is only part of the issue. Invariably, secured lenders (such as HMRC and banks) get most of the proceeds of sale from an administration, leaving unsecured creditors – mostly suppliers – with nothing.

UK corporate insolvency laws still need overhauling. The Government’s U-turn on tightening the rules on pre-packs is disappointing. We need tighter rules against directors of insolvent companies buying back assets after ditching their debts. I’d like a UK equivalent of the US Chapter 11 process, where both unsecured and secured creditors have a possibility of getting something back.

  • Patrick Woodall is chief executive of retail and consumer specialist Pragma Consulting (part of the St Ives Group)

Readers' comments (2)

  • Totally agree, pre pack is an absolute scam

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  • Pre packs are just plain wrong. It's making bad businesses run even worse!

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