Following the consultation on from Ed Davey MP's announcement that he is looking into ways of improving the prepack administration process there has been much comment. The principal complaint, as most people know, is that the process is seen as opaque and unsecured creditors get no chance to scrutinize the deal to sell the business. This is particularly an issue where the company is sold to the previous management very quickly.
On the one hand, the prepack is seen by turnaround practitioners as a useful tool to save a business. The principle purpose of administration is after all rescue first, then the best return achievable for creditors. Of course one tends to go with the other. If a business is in dire financial trouble but there is a possibility that the business could be sold, jobs saved and a new management team in place, even with some previous directors on board, is this not a good thing?
On the other hand, the problem is that there is often not a chance for a competitive bidding situation to emerge as time is critical to stop immediate creditor legal actions such as a winding up petition. The government is proposing a time period of three days in which creditors can challenge the deal. SIP 16 is in our view a sensible check and balance that ensures that other options have been evaluated. In the absence of buyers, and tight finance, there are unlikely to be many buyers in the market so as long as the management can buy the business and assets at a fair price then it is often the only option. It should be remembered that if a business is put into administration for a period then the return to creditors is likely to be poor especially if employees walk and much of the goodwill of the business is lost.