One of the biggest problems of pre-pack is that the creditors of the old company are left with their debts unpaid which could cause their businesses to fail or struggle also. Some people think that because Creditors are left unpaid that the process of pre-pack is unethical and that Directors are not taking responsibility for their liabilities.
However the pre-pack process is not the cause or reason why creditors loose their money, as they were already not being paid by the old company and if the old company had been left to continue then it would have gone into administration and the creditors would have lost out anyway.
With an insolvent business, creditors are likely to lose out in the long run, however one of the benefits of pre-pack compared to other insolvency process is that the business can continue trading and employees can keep their jobs.
Whilst some people see pre-pack as unethical there are strict guidelines in place which means that the process can only be entered into if it is in the best interests of the creditors.
When pre-pack is not appropriate
Whilst there are many advantages of pre-pack administrations that far outweigh the disadvantages there are some occasions when pre-pack is not advisable:
If a creditor holds a debenture over its debt then the business can not be sold without the creditors knowledge. The creditors can also choose to overrule the administrator appointed by the directors and they can appoint their own administrator who may not agree that pre-pack is the best option.
If you plan to use pre-pack to restructure your business completely and get rid of all your staff then pre-pack should not be used, because your employees are protected under the TUPE regulations (transfer of undertakings and permanent employment). This means that your employees and all their employment rights must be transferred to the new business, unless a formal redundancy procedure has been followed.
If you are worried you may be found guilty of wrongful trading then get advice and seriously consider whether pre-pack is for you. Once the new business has purchased the assets from the old company, an administrator will usually wind down the old company, as part of this process they must submit a director’s disqualification report which details the directors conduct during the running of the business. If you are worried that this report may find you guilty of wrongful trading then pre-pack may not be for you.