Pre-pack adminstrations best choice says research

PRE-pack administrations offer the best chance to save jobs, according to new research by insolvency trade body R3.

According to research pre-packs offered the best chance to save jobs in six out of 10 recent cases dealt with by R3 members.

The other key reasons for going down the pre-pack route were the need for a fast sale and avoiding liquidation.

There were 5,478 jobs at risk from these pre-packs, which were carried out this year, with 4,846 jobs (88%) being saved through the process.

In half of the 89 companies analysed, including 11 from Yorkshire, a pre-pack was the only alternative to liquidation.

In more than two thirds of cases professionals said the sale had to be done quickly because rumours about financial difficulties would have destroyed what remained of the business.

The research was carried out in response to growing concerns that unsecured creditors are being short-changed through the process.

Andy Wood, partner in The P&A Partnership and regional chairman of R3 said:”With a dearth of buyers and incredibly tight financing around, a pre-pack is often the only option left in a large number of cases.

“The previous owner does not by right stay in place – in 41% of cases they did not. And in the current climate, you only need a whiff of trouble to reach one of your customers or suppliers, to find the whole business disappearing overnight.”

In January, the Insolvency Service announced that it would ensure creditors were being given sufficient information when a pre-pack was agreed – and they would follow up cases with the regulators if they had concerns.

The research showed that virtually all (99%) of respondents are following the best practice processes for working with creditors, as agreed with the regulators.

Mr Wood added: “There has never been a recession like the current one. The difference now is the lack of financing.

!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 agree to pre-packs wherever possible – they really are often the only option to save jobs and achieve returns for creditors.”

However, the Insolvency Service’s recently opened consultation on proposed reforms to the insolvency regime could see the focus shift from pre-packs to company voluntary arrangements (CVA).

Recent high-profile CVAs include Yorkshire AIM-listed caravan retailer Discover Leisure and sportswear retailer JJB. Both were negotiated by accountants KPMG. 

According to Mark Firmin, restructuring partner at KPMG in Leeds, the consultation has a welcome focus on extending the role of CVAs as a rescue tool.

He said: “A CVA, unlike an administration, means the company remains under the control of its management and therefore makes it a much more effective tool in achieving corporate rescues.

“The suggested extension of the moratorium and ‘super priority’ of rescue finance sound superficially attractive, but it is critically important that the contractual rights of secured creditors are not overridden, which would have serious implications for the availability and cost of bank finance.”

Mr Firmin continued: “Also there will need to be protection for creditors to ensure that they are not kept at bay unfairly by irresponsible management teams wasting their time and money on plans that do not stack up.”