Like many pieces of well-meaning legislation, pre-packs (or pre-packaged sales) are neither without flaws nor without just criticism; however many of the controversy surrounding them relates more to the way in which they have been misused than to serious failings with the system itself.
Pre-packs have been held open to abuse as being essentially a new twist on the old problem of asset-stripping. The Insolvency Service took steps to stop this by introducing new guidelines for Administrators, which took effect in January 2009. One of the key points of these guidelines is that Administrators must provide creditors with both the name of the buyer in the pre-pack transaction and whether or not there is any connection between the buyer and the company. The Insolvency Service has also indicated that although these guidelines are not actually points of law, failure to follow them could leave Administrators open to disciplinary proceedings. They have also indicated that they will rigorously pursue any directors who use pre-packs as a means to dispose of company debts before buying back the healthy part of the business.
There have also been concerns raised that Administrators may have their professional judgement swayed by the need to win business for their company. In other words, if company directors have decided that they wish to implement a pre-pack, they will have a preference for appointing an Administrator who will support them in their plans. There were allegations that Administrators were tacitly accepting the creation of Phoenix companies (raised from the ashes of pre-packs) purely because they were made aware that they were being offered the business on this basis. The 2009 guidelines address this situation and creditors who have concerns about the manner in which a pre-pack has been conducted can contact the Insolvency Service directly through their hotline as a simpler alternative to initiating legal proceedings.
Possibly the biggest issue with pre-packs is the fact that they can be organized in secrecy. Unsecured creditors do not have to be consulted before the sale takes place. (Secured creditors do as they have to agree to their security being released). This is a complex issue. While it is true to say that, in theory, unsecured creditors usually have the opportunity to recover more of their money if the standard Administration procedure is followed, it is also fair to say that many companies use pre-packs because they have literally run out of money (or very nearly so) and simply would not survive long enough to go through Administration. This being so, the aim of the pre-pack process should be to sell as much of the business as possible for as much money as possible. If it becomes public knowledge that a business is being sold due to financial difficulties, its value may drop dramatically, which is why pre-packs are often highly confidential proceedings. There is also a very real risk of losing key employees, which could devalue a business still further, particularly if they move to a company’s direct competitors. Again, if creditors believe that they have been meaningfully disadvantaged by the pre-pack process, they can contact the Insolvency Service for assistance.
The 2009 Insolvency Service guidelines have gone a long way towards rectifying concerns about pre-packs. While they remain under scrutiny, all indications are that they will remain in much their current form for the foreseeable future.