Richard Heis, restructuring partner, KPMG

While it is sad that some businesses fail and people lose money or their jobs, it is important to ensure that insolvency practitioners have the tools, such as pre-packs, to protect as much as possible and as efficiently as we can.

Pre-packs can be used to complete a complex financial restructuring at a holding company level, and the only stakeholders who might be compromised are the shareholders and financial creditors, and they are frequently consulted. Customers, landlords and suppliers will often not be affected.

Pre-packs are useful where a company is in distress but a widespread and
public sales process could damage the underlying business. An example was Torex Retail, where a sales process was conducted against the backdrop of negative publicity about the company and the consequent cash haemorrhaging. The sale price was less than the bank debt and the only way to sell the group to its new owners was through a pre-pack. Without one, the cost in jobs and value would have been massive.

A pre-pack allows the value of the business to be tested in a discreet way so that value can be attributed, perhaps through a debt-for-equity swap, to stakeholders. Other pre-packs enable insolvency practitioners to separate the viable parts of a business from elements that are impractical and quickly transfer the ownership of these parts to a more stable home.

There are circumstances where boards of directors that have built up too much debt and trade credit see the pre-pack as an easy way to create a so-called "phoenix" company, leaving creditors high and dry. The new requirements for transparency imposed on insolvency practitioners, known as SIP 16, go a long way to ensure pre-packs are not abused, but it is also essential that insolvency practitioners act responsibly towards genuine stakeholders.

Marc Henstridge, head of risk, UK and Ireland, Atradius

While pre-packs were founded with good intentions, loopholes leave them exploited by individuals with less honourable motives. This will only improve if the governance of pre-packs goes through fundamental change.

Business survival rests on two key components—cash and management. If a failing business has sufficient cash, it doesn't need a pre-pack. And if its management hadn't failed in the development of the business model, it would be thriving—not entering a pre-pack and driving suppliers out of business. Many suppliers are struggling to cope with lost revenue in the downturn. Over many years, in the quest for better returns and financial efficiency, businesses have been persuaded that erosion of margins is acceptable practice.

So when a trade partner, which persuaded a supplier to work with it and accept decreased margins, decides to proceed with a pre-pack, it puts the supplier's business at serious risk-unless credit insurance is in place.
The partner enters into administration and is put up for sale. A new owner is found—often the original one—and the company abandons the debt burden. The same management team that failed is now in a stronger financial position and will benefit from pre-pack legislation in a way that was never intended. Unpaid invoices are left by the wayside.
Non-profitable elements of the failing business are left in administration and unpaid bills remain ignored. But the management team keeps drawing salaries. A failed team using a pre-pack to avoid repaying unsecured debt is morally reprehensible. It's time to play fair.