Company insolvency experts The Business Rescue Service today welcomed news that the Government is delaying new laws on pre-pack administration.Changes were proposed to tighten up the rules applying to firms created for the sole purpose of restructuring, after a company collapses due to debt. Pre-pack has raised concerns about rogue businesses abusing the system in the past, but the Business Rescue Service joined other industry experts in defending their use among legitimate firms.
Pre-pack may be one of the methods used to prevent company insolvency deteriorating into voluntary liquidation – or having creditors simply obtain their own, final liquidation order. They allow time for existing directors and/or managers to buy the existing firm, unlike liquidation which closes it down permanently.
Critics have argued that pre-pack can be used by unscrupulous firms to resume immediate trading – minus the debts. They also complain that the sale of the business can happen without creditors even being aware of it. Industry experts disagree that the system is open to wide spread abuse. Will Black speaking for the insolvency trade body, R3 has pointed out pre-pack administration tends to return more funds to secured creditors than compared to a ‘regular’ sale of the business commonly does.
“With a pre-pack administration, the vast majority of companies are looking to return as much money as realistically possible to their creditors. Often the company owes money to the very people it has a vested interest in maintaining good relations with – like suppliers, accountants, and so on. It’s not about companies trying to escape their obligations, in fact, it can be the best way to retain the value of the business for all concerned,” said a spokesman from The Business Rescue Service.
There had also been particular concerns within the business recovery industry that changes to legislation could have meant creditors actually suffered more. A proposal to include a three day period of notice prior to the sale had been a hotly contested issue. Many had commented that 72 hours publicising company insolvency could lead to a domino effect as suppliers, staff and customers scramble to withdraw their support.
“For Directors who purchase their own firm through pre-pack, this would be the last thing they want. The key to pre-pack is retaining as much value as possible from the original firm – this can be contacts, key personnel, suppliers, loyal customers and potential new clients. All of these are vital during the restructuring phase, when known problems can be addressed leaving the firm in a much stronger position for the future. That window of opportunity to improve the situation can actually work in favour of both secured and unsecured creditors,” said Business Rescue Service said today.