Court ruling endorses rescue tool for struggling firms

Pre-pack administration deals could rocket in the channel after a landmark ruling has effectively endorsed them as a legal rescue tool.

Pre-packs allow a company to continue trading while its assets are sold without the burden of debt.

A High Court judge recently rejected a claim by HM Revenue and Customs (HMRC), after it was saddled with debts of £1.7m when DKLL Solicitors was bought from administration by rival Drummonds Kirkwood LLP.

The judgment follows a spate of pre-packs in the channel, including the re-emergence of Evesham, Probrand's purchase of HKW and Kelway’s purchase of Elcom.

Nitin Joshi, founder of advisory firm ChannelMoney, said the ruling could prompt more directors to use pre-packs to salvage their business.

“This is confirmation that pre-pack is considered a good thing. It is a tool that VAR directors should be using,” he said.

Eddie Pacey, director of credit at distributor Bell Micro, said pre-packs are often the only way to ensure continuity of business.

“It will give firms that are genuinely struggling comfort to know they are not viewed as ogres when it comes to pre-packs,” he said.

“I am relieved by this decision and there are still rules in place to clobber dodgy dealers using back-street insolvency firms.”

Nick Smith, marketing director at PC builder Elonex, which saw rival Evesham undergo a pre-pack administration despite putting in a £1m offer for the firm some months earlier, said: “I don’t think pre-packs are a problem as long as it is in the interest of creditors.

“The only problem is if it is abused, which the administrator should investigate. We still don’t know if this is the case with Evesham.”