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Thursday24 July 2014

Prepacks: enemy or saviour?

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Was the method used to sell YRM to RMJM sharp practice or the best option in a tough situation?

Pre-pack administration of a business can sometimes be referred to as a “managed buyout”. The sale is often to the business’s own directors, but can also be to an unrelated company — as with the recent sale of YRM to RMJM.

A business will enter administration if it is in financial difficulties and unable to pay its debts.
On formal insolvency, an administrator will be appointed who will try to rescue the company as a going concern.

Pre-packing a company effectively means arranging the sale of the company’s business in advance of this formal insolvency. A new company is set up prior to the administrator’s appointment and acquires the assets of the old company on the day of the administration. Most liabilities will be left with the original company so the new company is solvent and can trade using the assets of the old company with no restrictions.

The controversy arises when the existing management buys the business and large numbers of creditors are left out-of -pocket or employees lose their jobs.

Creditors find it strange that the business can be sold without any consultation with creditors, permission of the court, or an open-marketing process.

The administrator’s role is to act in the interests of the company’s creditors as a whole and when a company is declared insolvent its value falls rapidly as clients move elsewhere and employees look for new jobs. In a pre-pack the administrator takes the view that the best way to preserve this value is a swift pre-arranged sale of the business giving the appearance of a seamless transition.

The main alternatives to a pre-pack are:
• Trading Administration, where costs will increase and returns often diminish.
• Company Voluntary Arrangement (CVA), where creditors are asked to write off part of the debts they are due, a supervisor monitors the business and any default on the CVA proposal results in liquidation.
• Liquidation, where client and employee contracts will often terminate automatically as the liquidator will have no funds to pay them.

For employees, liquidation is the worst option as they are guaranteed to lose their jobs.


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