Pre-packs defy evolution

There was talk of moral hazard when the banks were rescued by us long-suffering taxpayers.

The danger is that reckless or rubbish investment decisions by the banks don't go properly punished if there's a taxpayer-funded get-out-of-jail card waiting around the corner.

There's more than a bit of this going on in our sector. One well-known multiple operator tells me that he's unable to acquire the best sites when companies fail because they've been bouncing back into the hands of existing management after a brief detour into administration.

Profit in business is the way you keep score. When a business makes thundering losses, it deserves, in the normal course of events, to fail and stay failed.

The rise of the pre-pack administration, by which businesses pass seamlessly through administration before emerging cleansed of their problems, is an oddity. It's not illegal, it's just very peculiar. It blocks the normal Darwinian evolution by which the strongest should prosper while the weak fade away.

The greatest injustice seems to get delivered to unsecured creditors who sit on the sidelines unpaid while a company starts a new chapter.

Pre-pack administrations are invariably driven by those who are owed the

most amount of money invested in an individual firm, whether it's a bank or sizeable equity investor.

But there's no doubt that plenty of people are getting left with a very nasty taste in the mouth. The normal laws of risk and reward are being subverted.

A further distortion is the fact that the pre-pack administration route isn't available to large swathes of businesses. Individual licensees are unable to shuffle off their creditors and start again. Quoted public companies would faced enormous damage to their credibility if they went down this route.

More than a little sympathy is due to Punch Taverns, which has around 50 sites that were previously sold to companies but have now boomeranged back out of pre-pack administrations. It's not unlike an individual licensee being forced to run a pub that he'd sold years ago because the buyer has gone bust.

Those companies that have taken the

pre-pack route will have acted in the best interests of shareholders and, arguably, employees.

But it seems innately unfair that some companies that bought bad assets prosper through shedding a skin of bad sites while other companies that sold assets in good faith are forced to cope with somebody else's mistakes.

Company law allows failure. But a mechanism that facilitates consequence-free "moving on" for one party at the expense of others seems cock-eyed.