Pre-packs the best solution to collapse, research says

Controversial pre-pack administrations offer the best chance to save jobs, according to research among its members by the insolvency trade body R3.

R3, which represents 97 per cent of UK insolvency practitioners, found that, in 89 pre-pack cases identified in a report, 88 per cent of jobs at risk were saved.

Other key reasons cited by R3 members for undertaking a pre-pack include the opportunity to avoid liquidation and the need for a fast sale, most likely because speculation on financial difficulties would have destroyed what remained of the business.

James Martin, R3 Midlands chairman and partner at the Birmingham office of Begbies Traynor, said: “A pre-pack is a deal for the sale of an insolvent company’s assets which is set up before the company enters a formal insolvency process. The deal will usually have been agreed before the insolvency practitioner is appointed but will be executed by the insolvency practitioner shortly after appointment.

“They are a misunderstood insolvency tool, the benefits of which are frequently lost in the debate over their perceived impact on creditors. However, independent research shows that pre-packs fare considerably better than alternatives in terms of the retention of jobs and returns to secured creditors.

“In today’s economic climate, with a dearth of buyers and incredibly tight financing, a pre-pack is often the only option left in a large number of cases. Furthermore, the speed with which pre-packs are performed is crucial in maintaining value in a business which would otherwise be diminished once its severe financial difficulties become known to staff and customers.”

In January 2009 the government’s Insolvency Service announced that it would ensure creditors were given sufficient information when a pre-pack is agreed and that it would follow up cases with the regulators if concerns are raised. The R3 research showed that R3 members are following the best practice processes for working with creditors, as agreed with the regulators.

Mr Martin added: “There has never been a recession like the current one. We have not seen the bottom of the market in terms of insolvencies yet, nor are we seeing any significant easing of financing. I would therefore urge creditors and the public to give greater recognition to the role of pre-packs in saving jobs and achieving returns for creditors.”