Pre Pack Administrations - Opportunity For Scams?

A business failure is a horrible thing. For those unfortunate enough to encounter this any avenue for relief must be welcome. There are some procedures in the UK and USA that offer protection from creditors and permit a business to trade away from difficulty. Even pre pack administration is a given in the US. There are other people that allow a business to be transferred debt free without any authorisation by the courts and so are therefore open to abuse from the fraudster.

About fifteen years ago my friend began his very own business growing fish in the west coast of Scotland. The early years of an aquaculture venture can be a lot more fraught with problems than in other industries. It takes years for the stock to grow to such a size that it's ready for sale. During this time he had to deal with livestock and the extremes of the Scottish weather. This meant that he faced one big problem after another. He had difficulties in acquiring the young fish to grow in, attacks by predators planning to eat his crop, dealing with design problems with his equipment, problems with security and problems with harvesting the final item. Solving each of these difficulties in turn cost quite a lot of money, which because he had no income from your slow growing stock forced him to lend from various sources such as the bank, from his along with from the government.

He managed to find solutions to all the issues and eventually had a strong core business. Still now his debts were really at high level that the business was no longer viable. He sought advice and ended up using a receiver appointed to cope with his business. He then bought back his business assets and carried on his business debt free. This was over a decade ago, and was always an area of the insolvency procedure that raised criticism with its commentators. In such cases the court needed to approve the procedure and a fair price was paid for the assets allowing the lenders to get some of their cash back at least.

But the Enterprise Act 2002 presented an even quicker procedure known as "administration" that was easier and cheaper to apply. Unlike the procedure used by my friend, it did not require judicial approval to ensure any deal being done was reasonable. The process is now known as "pre-pack" and allows a brand new company to arise utilizing the assets of another. The brand new company might be owned by the old directors or investors. In practice they arrange having an insolvency practitioner to sell the actual assets of the business before being appointed. Then, on appointment the sale of the business is a "done deal". The administrator does not require to consult anybody or market the business externally before the sale.

The insolvency arena will always be a rich picking ground for the scam investigator. In many cases it is simply because that is why time when the inner workings of a company are placed bare for outer scrutiny. However , in the case of the pre-pack process there may be a fine line between it being the most effective rescue package for a faltering business and a possible fraud investigation including fraudulent trading and removing the complete value of business assets through the hands of the creditors.

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