Pre-packaged insolvency

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Pre-packaged insolvency (a "pre-pack") is a kind of bankruptcy procedure, where a restructure plan is agreed in advance of a company declaring its insolvency. In the United States pre-packs are often used in a Chapter 11 filing. In the United Kingdom, pre-packs have become popular since the Enterprise Act 2002, which has made administration the dominant insolvency procedure. Such arrangements are also available in Canada under the Companies' Creditors Arrangements Act.

United Kingdom[edit]

The term "pre-pack sale" has been defined by the Association of Business Recovery Professionals as, "an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment".[1] The difference between a pre-pack sale and a normal sale is that ordinarily the administrator markets the business and negotiates the terms of the sale after his appointment.

A review by Dr Peter Walton of Wolverhampton University identified the following criticisms of pre-pack sales. There is a general concern that the pre-pack administrator, in agreeing to the pre-pack in consultation with the company’s management team (and usually its secured creditors), favours the interests of the managers and secured creditors ahead of those of the unsecured creditors. The speed and secrecy of the transaction often lead to a deal being executed about which the unsecured creditors know nothing, and which offers them little or no return. There is often a suspicion that the consideration paid for the business may not have been maximised due to the absence of open marketing. Credit may have been incurred inappropriately prior to the pre-pack and this may not be fully investigated.[2] Criticism of this nature had been levelled at pre-pack sales by John Moulton of Alchemy Partners in January 2009, saying 'Pre-packs could be very easily abused. Bad management can plan for a prepack months in advance, line up an administrator - and then be back running the business immediately. It means when retailers fail they are often being kept with the same directors when it would be much healthier if new management arrived and with fresh money to invest".[3]

The reasons why an administrator sells on a pre-pack basis, rather than after post-appointment marketing, vary from case to case, but often involve the following considerations. A pre-pack sale avoids the costs and risks of trading, and indeed the company and the administrator may not have the funds to trade. The value of the business may deteriorate during administration trading. There may be other factors to prevent trading, such as regulatory problems.[4]

The courts have held that an administrator can sell the company's assets immediately upon his appointment, without court approval or the approval of the creditors,[5] and can do so even if the majority creditor objects.[6] They have even approved transactions which, as a "necessary evil", have made payments to the former management while leaving little or nothing for unsecured creditors.[7]

In January 2009 the Association of Business Recovery Professionals issued its Statement of Insolvency Practice 16 [8] which requires insolvency practitioners to disclose the following matters to all creditors as soon as possible after the completion of the sale:

● The source of the administrator’s initial introduction

● The extent of the administrator’s involvement prior to appointment

● Any marketing activities conducted by the company and/or the administrator

● Any valuations obtained of the business or the underlying assets

● The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes

● Why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration

● Details of requests made to potential funders to fund working capital requirements

● Whether efforts were made to consult with major creditors

● The date of the transaction

● Details of the assets involved and the nature of the transaction

● The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration

● If the sale is part of a wider transaction, a description of the other aspects of the transaction

● The identity of the purchaser

● Any connection between the purchaser and the directors, shareholders or secured creditors of the company

● The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred

● Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business

● Any options, buy-back arrangements or similar conditions attached to the contract of sale.

A pre-pack administration offers quite a few advantages but it also has a downside.[9] The main benefit is the 'continuity' of the business - the company is protected by the Court. This gets rid of debts, contracts and possibly some employees (TUPE issues are normally addressed beforehand). Another big advantage is that the cost of the process is lower than trading administration, as the administrators do not need to find funding to trade the business. The downside of a pre-pack administration is that it can attract negative publicity if the former directors are seen to be shedding liabilities.

The Insolvency Service monitors compliance with SIP 16.[10] Its reports show that in 2010 it reported 10 insolvency practitioners to their licensing bodies, and in 2011 it reported 21.[11]

United States[edit]

See also[edit]

Notes[edit]

References[edit]

  • V Finch, 'Pre-packaged Administrations: Bargaining in the Shadows of Insolvency or Shadowy Bargains?' [2006] Journal of Business Law 568