Perils of ‘doing a pre-pack’ —it might save ailing firms but creditors are left bitter

Joshua Rozenberg
28 Jan 2009

The restructuring of FishWorks struck me as a classic of its kind. Despite the departure last year of its founder, Mitch Tonks, and the sale of some underperforming outlets, the seafood chain was still in difficulties and shares were suspended on 7 January.

PricewaterhouseCoopers (PwC) were formally appointed administrators last Tuesday. A day later, they sold the brand and four restaurants, including two in central London, to a private investor, Ranjit Boparan, who had made his money as a chicken processor.

But Boporan did not want to burden himself with the remaining six sites, including restaurants in Chelsea, Islington, Primrose Hill and Chiswick. These were closed immediately with the loss of 90 jobs.

The deal was described in one newspaper as a “pre-pack” — nothing to do with processed food but still regarded by some as a term of abuse.

A typical pre-packaged administration sale is one where an insolvent company goes into administration for no more than a minute before its assets are sold to another company. If the purchasing company is owned by the same people as the selling company, the pre-pack is sometimes known as a “phoenix” because it enables the same business to be born again from its own ashes. Either way, it carries on trading.

PwC said FishWorks was not a pre-pack in the usual sense because the administration and sale were not announced and completed on the same day. However, since 50 potential purchasers were approached and five bids considered, the administrators must have been identifying potential buyers before being formally appointed — in case, as seemed likely, the company became insolvent.

A good example of a phoenix rising from the gas stove is Tom Aikens. As the Evening Standard reported this month, the celebrity chef sold two of his restaurants to a holding company called TA Holdco, continuing to trade lawfully while suppliers were left unpaid.

Pre-packs are particularly attractive to an insolvent company's bankers and to potential purchasers. They are bad news for the taxman, most trade creditors and — above all — landlords who find themselves with empty shops and offices. That is because the only liabilities that the purchaser will typically take on are bank loans — which are secured — and money owed to those suppliers who have “ransom value”, according to Ben Larkin, head of restructuring and insolvency at the City law firm Berwin Leighton Paisner.

“If they are the only people who can supply the particular product you need,” he explains, “they have commercial leverage.” Otherwise, the new company will simply buy its stock elsewhere.

“The new company looks a lot more attractive than the old company because it has all the assets and, perhaps, half the liabilities,” Larkin explains.

But “sometimes advisers need to step away from their daily work in order to grasp how the outside world perceives what has become commonplace in the restructuring community,” writes Larkin in the introduction to Restructuring and Workouts (Globe Business Publishing). Though Larkin supports the use of pre-packs in appropriate cases, he does not believe they should have become the “default setting” for insolvent companies.

And it was never meant to be like this. Since the Enterprise Act 2002, administration has replaced receivership as the main insolvency regime. “The primary aim of administration is meant to be
the survival of the company,” he says, “and that hardly ever happens.”

Dan Schwarzmann, head of business recovery services at PwC, insists pre-packs are not the default setting for insolvency practitioners. “Where used properly, they have saved many businesses and jobs. They maximise the return for creditors by preserving at least some of the value of a business's goodwill and brands. The alternative is often the end of the company altogether, with the loss of jobs and future business for suppliers.”