Is it time to put pre-pack to bed once and for all?

Given the recent surge in large high street names entering administration and the controversial insolvency of the Comet electrical store chain, pressure is mounting on the government to review the UK insolvency regime.

Business Secretary, Vince Cable, is once again looking into the possibility of changing the current regime. Reports suggest he may consider incorporating some elements similar to the US Chapter 11 rules.

Cable has been under pressure to review the existing regulations after the owner of the Comet chain, private investment firm, OpCapita, supposedly walked away from the insolvency with the £50 million dowry it was paid at the time of its purchase of the electrical stores. This was despite the government having to find over £20 million to cover redundancy payments after the chain was forced to let 7,000 workers go. Comet also owed the government some £26 million in taxes at the time of its collapse.

Although Comet has not been sold off in a pre-pack arrangement, the controversial was in which the administration was handled prompted calls for tougher restrictions to be introduced to strengthen the UK insolvency regime. Pre-pack administrations have long been an area that has attracted criticism and the government has considered an evaluation of the rules many times.

So what’s so wrong with pre-pack?

A pre-pack deal is one that involves a business’s assets being sold off in a deal with a buyer before the company begins the official insolvency process. As a result, fewer prospective buyers are ever aware that the business is for sale and fewer creditors know they should be looking out for their own interests after investing in a vulnerable business.

Pre-pack deals can sometimes work in the favour of the owners and the creditors when a business really is on its last legs. However, creditors are much more likely, in the case of a pre-pack, to feel like the deal is done before they are even aware of the insolvency. Marketing the businesses for sale to achieve the best price is no longer an option and owners and insolvency practitioners may receive a better deal from the sale than creditors.

Following the Comet collapse, Mr Cable made it clear that OpCapita had some serious questions to answer about how the administration was handled. Speaking to MPs on the subject, he stated: “The collapse of the Comet chain has caused great distress.”

In response to questions about the £50 million dowry and the bill left with the taxpayer, Cable said: “I take these allegations very seriously and that’s why I’ve asked my department to conduct a thorough inquiry with the powers they have.”

He concluded that the case exposed “possible failures in the system and there [should] be better ways of handling insolvency”.

If changes do take place and pre-pack is no longer an option, buyers have more access to businesses for sale on the open market and creditors are more likely to walk away with a fair portion of the price paid.

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