Page last updated at 10:57 GMT, Wednesday, 21 January 2009

Insolvency law to deepen downturn?

By Paul Burnell
BBC File On 4

In the dying days of 2008, fashion retailer USC became another High Street chain hit by the credit crunch.

High street
Pre-pack administration offers a chance to save firms it is claimed

The Scottish-based chain was put into administration, but almost immediately a new company bought back 45 of its 58 shops, minus the debts of the former company.

So-called pre-packaged administrations like this one have become a regular feature of business salvage operations since the 2003 Enterprise Act made going into administration easier, quicker and cheaper.

Pre-packaged administrations take place where a deal is struck prior to administration to sell on part of the business.

'Saving jobs'

Companies who take this option say such deals can rescue profitable parts of ailing businesses, saving jobs and offering a fresh start to failing companies.

USC was an arm of West Coast Capital, part of the business empire owned by Sir Tom Hunter, one of the UK's wealthiest businessmen.

The new company that bought USC's viable assets was called Dundonald Holdings Ltd, also part of Sir Tom's business empire.

Insolvency practitioner Bryan Jackson, who advised the company beforehand, and then became the administrator, explained the rationale.

"Pre-pack is really where the deal to sell on part of the business is actually agreed in advance so that it can be effected immediately and the reason for that is to try and retain the brand value of the business," he says.

"It's really all bound up with the rescue culture that has grown up in recent years where it is better to try and rescue part of the business than to let the whole business die."

MPs' concerns

West Coast Capital says the company was trying to save as many jobs as possible - perhaps two thirds of its 1,200 workforce, arguing that it was better to lose 15 stores than to lose all 58."

The company says it had lost money as a creditor and was taking steps to reduce the losses suffered by unsecured creditors and suppliers.

Peter Luff MP, chair of the Commons Business and Enterprise Committee, is concerned however, that other companies are using pre-packs to ditch their debts and pass their misfortune to their unsecured creditors and suppliers instead.

"In the last few weeks I've been hearing a great deal more expressions of concerns about administration in general and pre-pack administrations in particular," says Mr Luff.

It's a pirates' charter really.
John Batcherlor, 'asset stripper'

"They've featured very largely in the representations my committee's receiving ahead of its session with the Insolvency Service in a few days time."

The Enterprise Act has also had other consequences, File On 4 has learned.

Self-confessed asset-stripper John Batchelor told the BBC, the act has made it much easier for "people to tear a company to pieces for their own gain."

He added: "Pre-pack administration allows you to control events, whereas buying a company you are competing with somebody else for the assets.

"It's a pirates' charter really."

'Saving businesses'

Mr Stephen Speed, head of the government's Insolvency Service, said a key feature of the pre-pack has been that a significant number of jobs have been preserved and that businesses have been saved.

USC shop in Edinburgh
Some businesses say pre-pack is the only way to save jobs

He pointed out that when a business goes into conventional full length form administration, unsecured creditors or supplier companies can also lose money.

"That is what happens in insolvency," he says.

Mr Speed says he had no systematic evidence of asset strippers exploiting the system, but he would be happy to hear such evidence.

He added that the economic crisis had brought insolvency to centre stage, "but it is wrong to draw an inference from that, that somehow insolvency law is not fit for purpose. I am afraid we believe it is."

Deeper recession?

Mr Speed is due to face MPs' questions when the Business and Enterprise Committee questions the Insolvency Service next Tuesday.

And with the economy expected to be officially declared in recession from Friday, the committee is anxious to know if administration or pre-pack administration is inflicting more damage on the economy.

"I can understand the case for easier, quicker and cheaper administration," says the committee's chair Mr Luff.

"The principle of administration is sound but you've got to make sure that the administration process is working in a way that doesn't disadvantage people and impose other costs on the economy," he said.

And he added: "It could be that pre-pack administration actually drives the economy deeper into recession."

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