Why pre-pack insolvency models have a role to play

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Regardless of the criticisms of the pre-pack model, it is being increasingly acknowledged as helpful for business models experiencing disruption.

The Institute of Chartered Accountants in England and Wales (ICAEW) is occasionally asked by international regulators to help with insolvency structures in their jurisdiction. Mostly, they follow the UK model or the US equivalent; both are seen as helping businesses with their financial struggles.

A variety of sectors include disrupted business models, which regularly tests the UK model. An example of this is high-street retailers competing with high rents and the growth of internet shopping.

It has been claimed that 5,855 retailers permanently closed down in 2017; Toys R Us and BHS were included in the household names that disappeared. Other businesses had to reduce the number of their branches; some had to make staff redundant.

Because of this, the pre-pack model was reviewed several times since 2010, where the Government wanted to improve the transparency and confidence in the system.

Teresa Graham, ICAEW member admitted that before she began a review on the system, she had negative opinions on pre-packs. However, after reviewing the evidence, she found that there is a place in the UK’s insolvency mechanism for pre-packs, though she suggested ways to improve it.

One suggestion was to have a group of experts who could be approached on a voluntary basis – this was implemented in 2015. Since then, the Government has decided that in order to preserve jobs and businesses, the pre-pack mechanism should be continued.

The average life span of businesses is falling, with only 41.7 per cent surviving beyond five years. In order for companies and businesses to be able to continue trading with a viable business model, the pre-pack method is suggested to still be worthwhile.