With the national economy still looking wobbly, Danielle McCormick, solicitor on the retail team of Thomas Eggar LLP, looks at the trend for pre-pack administrations...

Mervyn King, Governor of the Bank of England has warned last week that it will not all be plain sailing for the economy during 2011. 

With the forecast for the economic growth now revised from an optimistic 3.4% to a more realistic 2.5%, retailers in particular are left with the dilemma of how to deal with the expected further slow down.

Over the past 18 months a popular way for struggling retailers to burn off those excess calories (debt) has been to go for a pre-pack administration. 

The pre-pack is essentially the business equivalent of a diet pill, enabling those who dare to take one to trim down on the unwanted calories in order to fit into next season's mini, or 'newco' (new company). By ditching the excess weight a retailer can arrive in 'newco' leaner and fitter, ready to take on the challenges ahead.

This has had particular advantages for the retailer with multiple outlets, with the pre-pack proving to be a pick and mix exercise enabling them get rid of shops in underperforming areas whilst leaving behind those in markets showing signs of growth.

This method of binning excess debt leaves in its wake a path unfulfilled customer orders, unpaid suppliers, landlords and the tax man. So although the pre-pack may look like the smart solution, like the diet pill, it should only be used with a well thought through exercise regime, especially as those left in its wake are now fighting back. 

A recent example of this can be found in landlords that have fought back with a victory in the High Court. In this instance the court ruled that administrators of collapsed retailers must pay rent quarterly in advance if they continue to occupy shops. Prior to this ruling, administrators usually managed to pay rent weekly, making a huge difference to their potential outlay and cash flow as well as to the landlord's pocket.

Banks may also take a harder line which can cause difficulties. With the pre-pack requiring consent of the company's main banker, banks could find more ways to say no to this request than yes. 

Also the tax man, who has not been a preferential creditor for some time, may decide it is more favourable to go for a winding up petition, than wait to be left high and dry with other unpaid creditors following a pre-pack.

So what are the alternatives for shedding those unwanted calories? It might be old fashioned but negotiation is one area where you might have some success. For example, HMRC has recently announced that it will continue to allow businesses in arrears for VAT to enter time to pay arrangements, but only where it considers the business is viable, in genuine difficulty and likely to be able to catch up with its VAT arrears in time. 

With a double dip recession potentially on the way, do you look to simply swallow the diet pill and opt for the pre-pack or do you develop your own personal training regime and look to negotiate with your suppliers and develop a more sophisticated exit strategy which avoids the obvious pitfalls.