Law firm warns against 'quickie' company bankruptcies
A leading law firm is warning businesses of the possible dangers of 'quicky' insolvency business sales, saying that 'prepack administration' is fraught with risk.
Mace & Jones insolvency unit partner Dominic Vincent said the technique of ‘prepack administrations’ involve bosses drawing up a scheme to break up a company in advance of it going bust. When it goes into administration its valuable assets are immediately bought out from the administrator, often by a company 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.
“Pre-packs are increasingly being used by directors and owners to jettison loss-making parts of a business along with its debts while setting up a new one to take over the profitable operations,” he said. “Whilst it is perfectly legal it is vital to get the law absolutely right. It is critical for example for the insolvency practitioner to comply with the relevant standards of good practice. There must be proper justification as to why a business was sold back to management rather than advertised more widely. The process must be carefully planned and must not be rushed.”
Mr Vincent said when done properly a pre-pack can produce the best outcome for creditors and save jobs.
Several recent high-profile company failures have included a pre-pack deal that will allow existing bosses to keep running the business. Speciality tea and coffee chain Whittard of Chelsea, Sir Tom Hunter's USC fashion chain and clothing retailer The Officers Club have all been sold back to their original owners using the pre-pack technique. Most Woolworths stores were also almost sold under a pre-pack deal to a property company last autumn until banks pulled the plug.
Further insolvency resources
Posted February 2, 2009
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