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Pre-pack administration in the spotlight

19 February 2009 by
Pre-pack administration in the spotlight

Colourful language from a celebrity chef is not unusual, but when Tom Aikens last month admitted that he felt like a "shitbag" after leaving his suppliers in the lurch following the administration of his restaurants it was a different thing entirely.

Aikens's mea culpa followed criticism that he had acted despicably by putting his restaurant business into administration and then immediately buying it back - minus almost £1m of debts - in a process called pre-pack administration.

The move highlighted why pre-packs - used by hospitality operators such as Aikens, FishWorks, Duchy Catering and Laurel Pubs in recent months - have become the subject of much controversy.

Percentage payout

Under a pre-pack administration, a business owner agrees with the insolvency practitioner to take the company into administration and buy back its assets at a discount, while agreeing a percentage payout to the creditors.

The controversy arises because the business is usually sold with little or no open marketing, while unsecured creditors are usually not informed of the pre-pack until after it has been completed.

This lack of transparency has been criticised by the Association of British Insurers, which warned that suppliers are "blindly trading" right up to the point of administration. It argued that, if there was more transparency, the client could make a choice over how much they supply to the company - a point made by many of Aikens's creditors.

Other critics have described the procedure as a way of wiping a business clean of previous liabilities, such as underperforming sites, "toxic" leases and obligations to suppliers, while allowing the management which had put the business in trouble to remain in control.

Neil Morgan, head of pubs and restaurants at property agent Christie & Co, admitted that, while pre-packs should preserve value for all creditors and safeguard the business from insolvency, there is currently a perception problem.

But there are always two sides to every story and, despite its controversial nature, a pre-pack administration is often the best way to save a failing business, according to research from the University of Nottingham.

Dr Sandra Frisby, lecturer in commercial and company law at the university, analysed 459 business sales and 272 pre-packs in the period between September 2001 and December 2004 and found that a significantly higher percentage of pre-pack cases led to all employees keeping their jobs.

"In 92% of the pre-pack cases all employees of the insolvent company were transferred to the purchaser the corresponding figure for business sales was 65%," Frisby said. "Business sales are four times as likely to result in the entire workforce being made redundant than preâ€'packs."

Stephen Broome, hospitality director at consultancy PricewaterhouseCoopers, argues that a pre-pack can be advantageous for all involved, and can be the best way of extracting value from a dire situation.

"Pre-packs mean a business can be sold without negative publicity, which could destroy the value of the business and lead to loss of customers and staff," he said. "Indeed, it is designed to be a seamless process that enables business continuity."

However, Broome admitted that it was inevitable that the process would be seen by some observers as "opaque and suspicious" given the lack of visible marketing. Even City analysts disapprove, such as Mark Brumby at Blue Oar Securities, who has described pre-packs as "somewhat distasteful and not quite cricket".

"There has been a strong body of opinion arguing that such practices should be more regulated," Broome said. "The dilemma is how to impose such regulation where it is not possible, by definition, to consult creditors in advance of a pre-pack sale taking place."

Since 1 January new rules have required administrators to provide information to creditors on a range of issues when carrying out a pre-pack sale in an administration.

Administrators who implement a pre-pack sale must circulate the relevant information to creditors as soon as possible after the administration is commenced. In practice, therefore, creditors will know the position shortly after the appointment of administrators.

Transparent

"Whilst these new rules are unlikely to satisfy all creditors, they will hopefully make the whole preâ€'pack process more transparent," Broome said.

However, with experts predicting as many as 100 companies could be put through a pre-pack administration this year as recession bites, the controversy is unlikely to die away soon.

By Daniel Thomas

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