Back in April 2024, retail investors in Bidstack were left blindsided when the in-game advertising platform suddenly plunged into administration. To their astonishment, the firm’s core assets were almost immediately bought up by its own directors – who used them to launch an identical venture under a new legal guise in a so-called ‘phoenix rescue’.
The name Bidstack was secured as a going concern. But investors were left millions of pounds out of pocket.
It’s far from a unique story. Just months earlier, former shareholders in Yorkshire’s Black Sheep Brewery cried “daylight robbery” over a remarkably similar deal that saw the stricken company placed into administration, have large chunks of its dues to creditors written off, and then get snapped up as a going concern by new owners. Same brand, same directors, but all ties to its previous incarnation legally cut.
Such is the controversial world of pre-pack administrations. One of the more complicated insolvency procedures, ‘pre-packs’ take their name from the fact that the sale of an insolvent business is often arranged or ‘pre-packaged’ before the company formally enters administration. Like standard administration, control of the business legally reverts to the administrator, who is then responsible for operational and ownership decisions – including, as in the case of pre-pack deals, completing sales to new owners.
Because the sales are pre-arranged, pre-packs allow businesses to quickly ‘rise from the flames’ of insolvency – hence their nickname ‘phoenix rescues’. But the controversy stems from the fact that, as per insolvency law, the company doesn’t have to be sold as the same legal entity. The insolvent business can in effect be liquidated, and its assets – including premises, stock, brand – bought up to continue trading as a new entity, often by former directors, owners or major shareholders.
As in the case of Bidstack, Black Sheep and countless other businesses, the liquidation of the former company leaves creditors scrabbling for a share of remaining assets/sale proceeds, sometimes at a knock-down price. In the hierarchy of creditors, it is often small investors and shareholders who are left out of pocket. The ‘new’ owners, meanwhile, are free to trade without the encumbrance of previous debts.
Advocates of pre-pack administration argue that without the option for such expedited rescue processes, many more businesses facing insolvency would end up going under, leading to mass redundancies and harming the wider economy. Critics argue that it amounts to a loophole for owners to escape their debt obligations at the expense of creditors, especially smaller and unsecured creditors.
The case can be made for both sides. Here’s a summary of the pros and cons of pre-pack administration.
Pros of Pre-Pack Administration
- Speed: Having a sale pre-arranged means the process is swift, minimising the disruption to the business.
- Business Continuity: One of the primary advantages of pre-pack administration is the preservation of the business as a going concern. This means maintaining brand value and customer relationships, helping to preserve valuable assets.
- Job Retention: Another key benefit of continuity is that it helps to safeguard employment.
- Maximising Returns: While some creditors feel they miss out in some pre-pack deals, the flipside of the argument is that the quick sale of a viable business can achieve a higher price than if the business were to suffer disruption and reputational damage during a drawn-out insolvency process. This can result in a better return for creditors.
Cons of Pre-Pack Administration
- Lack of Transparency: A key criticism of pre-packs is the lack of transparency for creditors. Agreeing a sale before the administrator is appointed can leave creditors with limited opportunity to scrutinise the deal or propose alternatives. New rules introduced in 2021 were intended to boost transparency by requiring administrators to obtain an independent ‘qualifying report’ before any deal is agreed. But as noted above, grievances from creditors still occur.
- Potential for Abuse: Particularly in cases where existing owners/directors buy a business’s assets but choose to continue it as a new legal entity, critics argue that pre-packs can be used to unfairly benefit connected parties at the expense of creditors.
- Damage to Reputation: This perception of pre-packs being used as tools for rescuing failing businesses for the benefit of insiders can damage the reputation of the company and its brand.
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