Dominic Vincent says insolvency pre-packs need careful policing
A HITHERTO arcane phrase is becoming more common in the recession – the pre-pack.
The pre-pack involves firms in financial trouble calling in administrators.
The administrator draws up a scheme to break up the firm in advance of it going bust. When it goes into administration, its valuable assets are immediately bought from the administrator, often by a firm controlled by the same bosses, while the debts and loss-making assets are left behind. Creditors, staff or customers will often know nothing until the deal is done.
Recently, Whittard of Chelsea, clothing chains USC and The Officers Club have all been sold back to their original owners using the pre-pack technique.
But the concern among unsecured creditors is that this procedure deprives them of the opportunity to be involved in the insolvency process.
Responding to these concerns, the Insolvency Service told a Parliamentary hearing it would be taking a tough line on pre-packs, saying that insolvency law would be “actively policed”.
New guidance setting out standards for pre-packs has also been issued to the industry.
The reality is that pre-packs need careful legal planning. There must be proper justification as to why a business was sold back to management rather than advertised widely and the price paid should be supported by proper valuations.
DOMINIC VINCENT is an insolvency unit partner at Mace & Jones
