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Insolvency for Creditors 2012: Pre-packs slammed for creating "market distortions" 11 May 2012

Pre-packs have been slammed for creating “market distortions” and causing “significant damage” to creditors and rival businesses.

The controversial insolvency tool once more came under scrutiny at the Insolvency for Creditors Conference 2012.

The measures have previously been criticised for allowing failed businesses to resume trading debt-free and at the expense of their creditors.

And Andrew Brown, public affairs advisor for the British Printing Industries Federation, vented his association´s frustration at the process.

He said: “The use of pre-packs is disproportionately high and the damage to creditors and the competition is significant.

“It´s important to look beyond trying to rescue failed businesses and look at what´s in the best interests of of the sector as a whole.

“The last thing any business needs is competition from a rival which has freed itself from debts.

“The business is not only a dead man walking but has a spring in its step.

“This causes a market distortion to those that have managed to remain in business by their efficiency and offering quality service and commitment to meet payment obligations.

“Jobs which have been preserved are often more outweighed by those lost in competitive companies which have been undermined by the pre-pack.”

Brown cited statistics from the National Association of Paper Merchants which found four out of five industry companies that have been pre-packed have gone on to fail once more within two years.

However, Frances Coulson, partner at Moon Beever Solicitors, defended the use of pre-packs and insisted creditor returns are not affected by them.

She said: “The problem is people (creditors) need to stay engaged, remain interested and pursue directors.

“If you don´t pursue directors through insolvency practitioners (IPs) then the situation (of poor returns) will continue.”

And Dr Sandra Frisby, associate professor in company and commercial law, at Nottingham University, said the returns for trade creditors will always be poor, regardless of the nature of the administration.

She said that evidence of “dodgy pre-packs” remains “purely anecdotal, nothing statistical”.

Dr Frisby added: “The returns for trade creditors are always bad, by the time a company becomes insolvent the secured creditors have protections in place.”

 

 

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