February 4, 2013 8:40 pm

Pre-pack administration doesn’t suit all

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A Suit That Fits is a multi-award-winning tailoring business. It was set up by school friends David Hathiramani and Warren Bennett in 2006, as a way to achieve their twin ambitions of becoming entrepreneurs and helping the British public to be better dressed.

In December, however, it was forced to call in the administrators, after HM Revenue & Customs finally lost patience over an unpaid tax bill. Bailiffs were appointed by the tax authority to repossess sewing machines and other equipment at the company’s London headquarters, in an attempt to recover the £96,000 debt.

But unlike higher profile business failures of recent weeks – such as music retailer HMV and camera chain Jessops – A Suit That Fits was rescued in a way that saved most of its employee’s jobs.

Through a pre-packaged sale of assets to DW Clothing – a company wholly owned by turnround specialist Keith Watson – and the settlement of a £350,000 claim from the Nepalese manufacturer of its garments, the tailor was able to continue trading under its existing name.

But, employees and suit wearers aside, not everyone has welcomed the move. Pre-packaged administration deals, such as this, have attracted controversy because of the effect they have on suppliers and competitors.

Under a pre-pack, a company goes into a formal insolvency process, but can emerge days later under new ownership in pre-arranged a sale, having shed liabilities but retained assets – leaving creditors worse off.

In the case of A Suit That Fits, dozens of suppliers were left out of pocket, including the company’s bank RBS, which was owed just over £200,000 at the time of the administration.

Competitors felt aggrieved, too. The owner of a rival tailoring business, who asked remain anonymous, told the Financial Times he was angry that A Suit That Fits had been rescued, after it had driven prices down in the industry by pursuing an unsustainable business model.

“All they have actually done is damage the bespoke suit industry and make it harder for everyone else,” he said.

Neither of the founders of A Suit That Fits or Mr Watson were available to comment about their company’s rescue.

Others defend pre-packs, though, and the “phoenix” companies they create.

“Whilst it may appear at first blush to be unfair to creditors to receive a low or nil return, one should not lose sight of the fact that, if that company were in fact not rescued and placed into liquidation, a worse result would be achieved,” argues, Sarah McLennan, lawyer in the business litigation group of law firm Faegre Baker Daniels.

“Often the only people willing to buy a company out of insolvency are those who were running the old company,” she says. “Jobs can, and often are, saved by companies being rescued like this.”

More companies are expected to find them in this position, according to data from Syscap, an independent finance provider.

Until now, many lossmaking companies – as A Suit That Fits was ahead of its administration – have been able to continue trading by agreeing “time to pay” repayment schedules for outstanding tax bills with HMRC.

However, requests for funding to cover tax bills have still increased by nearly 60 per cent over the past year, Syscap has found.

Syscap says it received 480 requests for funding from businesses needing help meet their January 31 tax payments, up from 300 requests the previous year.

“HMRC is under a lot of pressure to get the tax that they are owed in as quickly as possible,” Philip White, Syscap’s chief executive said. “That means they have to put a lot of pressure on all businesses to pay their tax bill as quickly as possible.”

HMRC used its powers to seize property to meet unpaid bills, 10,577 times in the year ending March 2012, according to figures obtained by Syscap. That was almost double the 5,520 uses of this power of ‘distraint’ in the previous 12 months.

If more companies seek pre-pack deals as a result, not all will be undeserving, says Matt Swan, chairman of the chartered surveying business Plowman Craven.

In 2008, he was called in by RCapital Partners, a private equity firm specialising in business turnrounds, to lead the rescue of Plowman Craven after it ran out of cash.

“[Pre-pack administration] is a wretched business,” he admits. Nevertheless, having been through the process, he says it is often the only way to save a company that has got into trouble but remains fundamentally sound.

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