Can anyone explain the downside in pre-pack administration?

[fathippy]

This may be better suited to the accounts forum, but was in search of a wider audience. Can anyone explain to me why it is not a really good business idea to do a PPA on a regular basis - say once every five years to get rid of all the dead wood and debts. I know this sounds a little over the top, but I am getting increasingly frustrated at the number of companies who have traded badly over a period of time and then seem to just ditch any responsibility for that in one flick of a switch.

The obvious answer is that credit is affected, but I am not sure it really is. Perhaps from the previous suppliers/landlords/financiers, but then, without repaying them, it was never going to be repaired anyway. There doesnt appear to be enough "publicity" on these events to carry across to other providers. I know of plenty of counterparties who dont even know that a business has "phoenixed", and are just pleased that they have been given trade that was previously going to a competitor (albeit without payment).

I cant help thinking there must be a fairer way of doing this.

Finally -why doesnt the government just pre-pack RBS - would be one way of stopping Fred Goodwins scandalous pension, plus the "guaranteed" bonuses they are still paying !!

 

[stevesolo]

This raises quite a few issues fathippy, not least that you could find yourself in breach of the Companies Act and become personally liable as a result.

As a company director, your first responsibility is to the shareholders, and then to the creditors. This changes as soon as a company goes into administration at which point your creditors become your first responsibility. Any deal that is done by the administrator, pre-pack or otherwise, SHOULD be shown to be in the best interest of the creditors.

The fact is that some administrators sail very close to the wind because, of course, they get their fees before anyone else gets anything, and there's nothing better than a quick, easy deal.

There is a place for pre-packs in the right circumstances, and often it's the best option for the employees. But to try making a career out of serial pre-packing, moral issues aside, is crazy. At some stage, suppliers and banks will catch on and refuse to advance you any credit, so there won't be any point in a pre-pack!

 

[KidsBeeHappy]

Ethics, Morals, Social Responsibilty????

 

[fathippy]

not something i was planning to do - just cannot see what is deterring people from this course when on paper it seems such a simple and painless trick.

 

[KidsBeeHappy]

not something i was planning to do - just cannot see what is deterring people from this course when on paper it seems such a simple and painless trick.

Wasn't thinking for a moment that it was

I just meant that i hope that the moral/ethical argument would register with companies thinking about this. Social responsibility i think is a unwritten rule of the universe, which so often gets ignored.

I know that business can be cut-throat, and that economic situations mean that businesses end up doing things they don't normally want to do, but I would hope that the moral & social considerations would be on the table, as well as the pratical ones.

 

[jim_gold]

Ethics aside, as of January this year when new legislation came into force, pre-pack administration deals come under much closer scrutiny by the government's Insolvency Service. In particular, they are looking at misuse of pre-packs for directors' pecuniary gains.

In practice, a would-be serial pre-packer would have a good chance of being disqualified from becoming a company director, plus risk personal prosecution.

 

[vvaannmmaann]

Ethics, Morals, Social Responsibilty????

Filed under Ms Harriet Harman.

 

[jim_gold]

Interesting to see that pre-pack administrations are coming under another wave of scrutiny, this time by the Office of Fair Trading.

Not really surprising as the pace of administrations has picked up and the number of creditors left by the wayside has escalated.

The industry has always been quick to point out that pre-pack administrations result in the least amount of job losses. However, we don't believe that a proper analysis has ever been done of the whole scenario.

We would like to see some quantification of the effect on smaller creditors, many of whom have had to close down themselves following the administration of a large customer.