Pre-pack administrations

Erm, no. Trust the EU to get the wrong end of the stick here:

Brussels has declared it wants to encourage more \”second chance\” entrepreneurs like Mike Smith of engineer Derrick Services Ltd (DSL) to reverse the European trend of punishing honest business failures. It wants to echo the US approach of giving entrepreneurs credit for trying.

The Commission has profiled DSL and a dozen other small and medium-sized companies (SMEs) from across the continent to mark the launch tomorrow of European SME Week.

But some of DSL\’s former suppliers in Norfolk are angry about the debts they incurred when the original business went bust. Going into a pre-pack administration temporarily saved 400 jobs at DSL but suppliers that could not absorb the debts had to lay off staff.

The point of pre-packs, of simple bankruptcy procedures, is not to give entrepreneurs a second chance.

Far from it in fact.

It\’s to give businesses a second chance. The distinction is an extremely important one.

So, we\’ve a business, an organisation. It\’s a strange mixture of all sorts of things. Some physical assets yes, bit of land, machinery. And lots and lots of very specialist knowledge. Who are the customers, the suppliers, what do they all want, how do we do this etc.

And business value is becoming, more and more, embedded in that nebulous shit than in the land and machinery. At the extreme, knowing the phone number of and being on good terms with, the major buyer in your sector can be worth more than an entire office block (no, really, over the years, it can be).

So, when it all fucks up, what do we want to do? Well, first, of course, we want to take all the money away from the entrepreneur who fucked up. Risk and reward sorta stuff. So, that\’s the bankruptcy.

Second, we want to asset strip the fuck up. Move assets from their current low value use to a higher value use: create wealth. Sometimes such an asset strip will be about land: stick a supermarket, a small business incubator, where the no longer desired car factory was.

But increasingly it\’ll be wanting to preserve that set of knowledge within the company as that is the most valuable thing around. So don\’t break it up, treat it as the asset it is and whisk it away into a new legal structure.

Another way of putting this. Sometimes the whole is greater than the sum of the parts. The asset to be stripped is thus the whole. Other times the parts sum to more than the whole: strip them separately.

Pre-pack bankruptcies are a way to do the former.

Sod all to do with giving entrepreneurs a second chance.

6 thoughts on “Pre-pack administrations”

  1. But usually (not always), it is the original owner who sets up the new company which buys the business off the old company’s administrators.

    This is hardly surprising, as the old owners are in the best position to estimate the value of the business. A third part wouldn’t have a clue.

  2. If I understand the article correctly, Mike Smith is still running DSL, so in this case it seems that the entrepreneur got a second chance as well. Dumped his debts and is still presumably being paid and has an ownership stake in the new DSL. That’s the problem. In the bankruptcy proceedings, why didn’t they divide the ownership of the new DSL among the creditors? Debt for equity swap.

  3. Ed

    If the creditors became the owners, what would or could they do with it? It is unlikely they could run it themselves. The most sensible solution is to sell. If the previous owner is the highest, or only bidder, then so be it. The creditors get paid a proportion of the money owing, from fresh money injected into the company. So it’s really pretty much the same thing, isn’t it?

  4. Nick, maybe the end result would have been the same but it would be interesting to know how much say the creditors had in this matter.

  5. Mark Wadsworth has it.

    Pre-packs are usually where a company goes bust, and the owner forms a new company which buys the assets of the old one – leaving the debts behind.

    The owner doesn’t suffer at all; he gets to start off with a new company, with the same assets but a clean debt-free balance sheet, at the expense of his old company’s creditors.

    Worse, I think (but I’m not sure about this) that “pre-pack” means that it’s pre-arranged – before the old company is put into administration, the owner arranges with the potential administrator that the new company will be allowed to buy the old company’s assets for an agreed price. So no-one else even gets a chance to bid for them.

  6. A few facts to correct your misguided opinions chaps. I personnally lost £1.2m when DSL was put into administration. I then had to dip into my pocket to buy it back and bank roll it. Since then we have both secured and encreased the employment of staff, creating jobs, revenue into the local ecomony and significant tax contributions on profits earnt. Also, creditors have so far been paid 40p in the £1, with the administrator stating that they expect to pay out more.

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