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DON'T RUSH INTO PRE-PACKS, WARNS TMA

By CreditMan Tuesday, February 3, 2009

Britain's turnaround management specialists are warning recession-hit businesses not to rush into a pre-pack administration without first considering other options for survival as a going concern.

Responding to a report from the insolvency practitioners' association R3 seeking to clear pre-packs of the criticisms made of them, TMA (UK) Past President Tony Groom of Cambridgeshire-based turnaround and restructuring advisers K2 Partners says they do not offer an easy way out. “While they clean up a balance sheet by writing off liabilities, the trail of destruction they leave behind can have an adverse impact on the business's ability to continue trading,” he says.

“Fundamentally pre-pack sales are non-consensual and do not involve speaking to key stakeholders, especially those like suppliers whose support is crucial if the business is to continue but who feel aggrieved at being excluded from the restructuring process.

“While I welcome the R3 report and support the use of insolvency procedures as a tool for restructuring a balance sheet, I believe we are missing the fundamental issue. If businesses are to be saved, just writing off liabilities via a pre-pack does not involve the operational reorganisation that is needed for the future business to become viable and survive.

“Alternative consensual options should be considered that allow the company to continue to trade while involving suppliers and other key stakeholders in a proactive approach that ensures support for the business going forward. Pre-packs shift the problem of obtaining support to the new owners, who all too often are the old ones. All the Administrator has to do is prove that the best price was obtained for the assets sold via a pre-pack, which if compared to a liquidated asset sale is easy. This is elegant for the Administrator who is absolved of responsibility for the future business.

“TMA argues that if a business is to continue, a more consensual approach should be adopted, and that insolvency practitioners should bear some responsibility for helping ensure that the surviving business does not itself subsequently fail.”