Economic pressure has caused a massive increase in the number of recruiters going into administration.

However, Recruiter has discovered that almost 60% of the 17 recruiters that went into administration in January are still trading with the same directors in place.

This often happens under arrangements known as ‘pre-pack administrations’. In these instances the acquisition of a company is arranged prior to it going into administration, so it can be purchased shortly after, often by its original owners (although insolvency practitioners have an obligation to advertise externally).

One reason for the prevalence of pre-pack administration in the recruitment sector is the business’ value is often tied up in its personnel and relationships, rather than assets which retain value.

Michael Healy, director at national recovery firm Leonard Curtis, told Recruiter: “It’s a people business. If you lose the people then you have lost the value.”

Healy explained that every day a recruitment company went without trading its value decreased. This means that selling the business back to its original directors will often maximise value for creditors, as they know its value and do not have to go through lengthy due diligence procedures.

Creditors and pundits have criticised the procedure, which often leaves the same director in charge, with the same staff, telephone numbers, website and branding — debt free.

One recruiter, whose company has gone into administration in a pre-pack arrangement, told Recruiter that the process offered “a neat way of [legally] side-stepping a decent-sized Inland Revenue liability”.

However, is it fair on the company’s competition and creditors?

Jennifer Orr, director of Green Stone Search & Selection, who is still owed nearly £80,000 by Ellis Fairbank, which went into administration last October, told Recruiter that she thinks “pre-pack administrations are crippling this country” because suppliers are left out of pocket.

Philippa Foster Back, director of the Institute of Business Ethics, added directors need to balance consideration to its suppliers with the potential to save staff by avoiding liquidation.

In the aforementioned example, the anonymous recruiter said the arrangement had allowed the company to keep going, saving jobs and keeping all the branches open, although adding that creditors were left out of pocket.

A further 17% of recruiters going into administration were bought from the administrator and continue to trade under the new management, often with the staff and client base preserved.

Mark Bryans, managing director of Headway Recruitment Services, told Recruiter he bought the company in January, after selling it to the incumbent directors in 2007.

“I bought the company I had sold for £2.6m for £80k,” he said, adding it allowed him to give a stake in the business to the people who helped him set it up and that he was also looking for further acquisitions.

Bryans felt that for him to retain the company’s branding and clients was acceptable as the company was under new ownership in the “truest
sense of the word”, after having such a long time away from the business. He also criticised the rash of pre-packs afflicting the sector, highlighting how companies manage to reduce debt without having any effect on business levels.

“I think something needs to change [in terms of pre-pack administrations]. If you have the same management, the same staff and the same premises, I don’t think you should be able to trade under the same name — there should be something which allows people outside the business to know there has been a financial change.”