Related News

Home » Feature

Firms survive as 'pre-pack' scheme impacts creditors

AS British companies go bust at their fastest rate in nearly 20 years, a fast-track insolvency system that preserves brands and some jobs at the expense of creditors is becoming controversial.

In buoyant times the pre-packaged administration, or "pre-pack," was an attraction of the country for overseas entrepreneurs. Now critics say it may accelerate company collapses and is exacerbating the pain for small businesses.

With 4.7 million small businesses in the United Kingdom which, according to the Federation of Small Businesses, provide more than 58 percent of jobs to about 13.5 million people, the impact could be significant.

How pre-packs work is illustrated by the case of Whittard of Chelsea, a purveyor of fine coffees and teas that went bust last year. Contrary to expectations, the stores ?? with jolly teapot window displays and tourist-luring family crests ?? stayed in business.

The brand name was preserved, as were the jobs of around 1,000 Whittard's employees. But many lenders saw their loans written off as immediately after it went into administration, Whittard was sold to a private equity firm.

While most staff and even managers held on, many of the small and medium-sized businesses involved were left with unpaid debts. Their value was never fully disclosed, though a source close to the case said they included around 15 million pounds (US$22 million) of secured debt plus millions more in unsecured debt.

"With a pre-pack, all too frequently it is the case that for the sake of one company staying open, another has to close," said a spokeswoman for the Association of British Insurers.

Unlike "Chapter 11" bankruptcy protection in the United States, administrators in Britain cannot raise additional funding but must move swiftly to rescue a company.

In the United States, raising additional funds °??? or "debtor-in- possession financing" ?? can allow a company time to restructure its debt, and also offers existing creditors an incentive not to give up on the company.

But "pre-packs" allow a company going bust to be sold privately ahead of formal insolvency. The system is now used for more than half the British companies that fold each year.

The system gives rapid clarity, but groups representing creditors say the increased use of pre-packs can make it too easy for owners to walk away from their debts and then retake control of the company and resurrect it, phoenix-like.

An example of the painful consequences for smaller business comes from Peter Luff, a member of parliament for mid-Worcestershire in central England.

He said one of his constituents ran a small hauliers' firm and lost 54,000 pounds when a printing firm he supplied went into pre-pack administration. For the businessman, it was like seeing his retirement fund suddenly go up in smoke.

Many creditors ?? especially vulnerable ones like suppliers and customers ?? complained about the secrecy and suddenness of the process, which often leaves the previous management in charge but conveniently free of debt.

Member of Parliament Luff, who is chair of the British parliament's Business and Enterprise Committee, says there is growing anecdotal evidence that pre-packs need to be re-examined, especially given their impact on small businesses.

Luff's committee is conducting an inquiry into insolvency laws, including pre-packs, and will report later this month. "There is never smoke without some fire," he told an evidence session of his committee last week. "My political experience is that when issues climb up the agenda, they usually do so for a reason, not by accident."

Officials at the British government-backed Insolvency Service stand by the pre-pack, saying they have studied countries such as Australia and New Zealand to refine the law and continue to monitor international comparisons.

Stephen Speed, the service's director, cites World Bank data ranking countries for their "ease of doing business," which puts Britain among the best places to start up, and close down, a business.


Copyright © 1999- Shanghai Daily. All rights reserved.Preferably viewed with Internet Explorer 8 or newer browsers.

沪公网安备 31010602000204号

Email this to your friend