The proposed set of rules for ‘pre-pack’ administrations (where a company goes into administration with the prospective purchaser already in place and the sale effectively a ‘done deal’) has been given the thumbs-up by insolvency practitioners.
The main advantage of a pre-pack is that the company in difficulty can continue to trade without interruption. It is argued that this allows the best price to be realised for the company. It is also argued that it allows the administrator to avoid many expenses that would normally be incurred during the period in which a buyer is sought, thereby reducing the risk to other creditors of receiving a smaller dividend. In addition, pre-packs are claimed to reduce the likelihood that the business will be put into liquidation.
However, pre-packs have a number of opponents, including HM Revenue and Customs (HMRC), which often face a shortfall in VAT, Corporation Tax and/or PAYE when a company enters administration. HMRC have opposed a number of pre-packs in court, with varying success. A more recent alleged tactic involves the denial of VAT Registration Numbers to companies engaged in setting up a pre-pack.
The rule book will go some way to ensuring that pre-packs are dealt with in a consistent and ethical way.
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Partner Note
Reported in Accountancy Age, 9 October 2008 and 16 October 2008.