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.

Contents

United Kingdom

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 in a normal sale the administrator markets the business and negotiates the terms of the sale after his appointment.

The reasons an administrator sells on a pre-pack basis, rather than after post-appointment marketing, vary from case to case, but they often involve the following considerations. A pre-pack sale avoids the costs of trading (which means creditors receive more back), and indeed, the company and the administrator may not have the funds to trade. It also avoids the administrator taking on the risks associated with trading. The value of the business may deteriorate during administration trading.

There may be other factors to prevent trading, such as regulatory problems. [2]

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, [3] and he can do so even if the majority creditor objects. [4] Courts have even approved transactions that, as a "necessary evil", have made payments to the former management while leaving little or nothing to unsecured creditors. [5]

In January 2009, the Association of Business Recovery Professionals issued Statement of Insolvency Practice 16 [1] to require insolvency practitioners acting as administrators to disclose a number of matters to all creditors as soon as possible after the completion of the sale. This was done in an attempt to provide greater transparency to creditors.

On 1 November 2013, following a government-commissioned review, a new Statement of Insolvency Practice 16 was introduced. It requires administrators to disclose the following: [6]

The main benefit of a pre-pack administration is the 'continuity' of the business - the company is protected by the court. This gets rid of debts and contracts. It does not get rid of employees due to the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). 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. [7] Its reports show that in 2010 it reported 10 insolvency practitioners to their licensing bodies, and in 2011 it reported 21. [8]

United States

In the United States, typically the term pre-packaged bankruptcy is used instead of pre-packaged insolvency. A conventional bankruptcy case is one in which the debtor files for Chapter 11 relief without having agreed in advance to the terms of a plan of reorganization with its creditors. During the course of the Chapter 11 case, the debtor or, if the debtor does not retain the exclusive right to propose a plan, a creditor or creditor group may formulate and propose a plan of reorganization. [9] A company undergoing Chapter 11 reorganization is effectively operating under the protection of the court until it emerges. An example is the airline industry; in 2006, over half the industry's seating capacity was on airlines that were in Chapter 11. [10]

In a pre-packaged case, the plan proponents will have secured sufficient support from creditors to confirm their plan of reorganization prior to filing for Chapter 11 reorganization. Pre-packaged plans of reorganization virtually always impair (i.e. pay less than in full) one or more classes of creditors, and so in order to ensure that the plan can be confirmed by the bankruptcy court, the plan proponents must secure the support of at least two-thirds in amount and more than one-half in number of at least one such impaired class, in addition to ensuring the plan complies with all other requirements for confirmation. Two procedurally difficult aspects of the process are the announcement (which must be structured so as not to trigger contractual termination provisions) and getting the requisite creditor approval. [11]

In 2009, a new entity completed the purchase of continuing operations, assets and trademarks of General Motors as a part of the 'pre-packaged' Chapter 11 reorganization. [12] [13] As ranked by total assets, GM's bankruptcy marks one of the largest corporate Chapter 11 bankruptcies in US history. The Chapter 11 filing was the fourth-largest in US history, following Lehman Brothers Holdings Inc., Washington Mutual and WorldCom Inc. [14] A new entity with the backing of the United States Treasury was formed to acquire profitable assets, under section 363 of the Bankruptcy Code, with the new company planning to issue an initial public offering (IPO) of stock in 2010. [15] The remaining pre-petition creditors claims are paid from the former corporation's assets. [12] [15]

Criticism

A review from Wolverhampton University identified the several 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 offers them little or no return. [16]

There is often a suspicion that the consideration paid for the business may not have been maximized 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. [17]

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Chapter 11 of the United States Bankruptcy Code permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.

<span class="mw-page-title-main">Liquidation</span> Winding-up of a company

Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

<span class="mw-page-title-main">Bankruptcy in the United States</span> Overview of bankruptcy in the United States of America

In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

<span class="mw-page-title-main">Insolvency</span> State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

A fraudulent conveyance or fraudulent transfer is an attempt to avoid debt by transferring money to another person or company. It is generally treated as a civil cause of action that arises in debtor/creditor relations, typically brought by creditors or by bankruptcy trustees against insolvent debtors, but in some jurisdictions there is potential for criminal prosecution.

Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Other reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring.

In finance, a floating charge is a security interest over a fund of changing assets of a company or other legal person. Unlike a fixed charge, which is created over ascertained and definite property, a floating charge is created over property of an ambulatory and shifting nature, such as receivables and stock.

An undervalue transaction is a transaction entered into by a company who subsequently goes into bankruptcy which the court orders be set aside, usually upon the application of a liquidator for the benefit of the debtor's creditors. This can occur where the transaction was seriously disadvantageous to the company and the company was insolvent or in immediate risk of becoming insolvent.

As a legal concept, administration is a procedure under the insolvency laws of a number of common law jurisdictions, similar to bankruptcy in the United States. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – in the United Kingdom colloquially called being "under administration" – is an alternative to liquidation or may be a precursor to it. Administration is commenced by an administration order.

<span class="mw-page-title-main">United Kingdom insolvency law</span> Law in the United Kingdom of Great Britain and Northern Ireland

United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. Insolvency means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is liquidated, meaning that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the EU Insolvency Regulation, and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.

<i>Re Grays Inn Construction Co Ltd</i>

Re Gray's Inn Construction Co Ltd [1980] 1 WLR 711 is a leading UK insolvency law case, concerning the cessation of transactions without court approval after a winding up petition.

<i>Re Kayley Vending Ltd</i>

Re Kayley Vending Ltd [2009] EWHC 904 (Ch) is a UK insolvency law case concerning the pre-packaged administration procedure when a company is unable to repay its debts.

Administration in United Kingdom law is the main kind of procedure in UK insolvency law when a company is unable to pay its debts. The management of the company is usually replaced by an insolvency practitioner whose statutory duty is to rescue the company, save the business, or get the best result possible. While creditors with a security interest over all a company's assets could control the procedure previously through receivership, the Enterprise Act 2002 made administration the main procedure.

<span class="mw-page-title-main">British Virgin Islands bankruptcy law</span>

British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.

The anti-deprivation rule is a principle applied by the courts in common law jurisdictions in which, according to Mellish LJ in Re Jeavons, ex parte Mackay, "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." Wood VC had earlier observed that "the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors."

<i>Re TransBus International Ltd</i>

Re TransBus International Ltd [2004] EWHC 932 (Ch) is a UK insolvency law case, concerning the discretion of an administrator to trade with a company's assets.

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

<i>Brooks v Armstrong</i>

Brooks v Armstrong[2016] EWHC 2289 (Ch), [2016] All ER (D) 117 (Nov) is a UK insolvency law case on wrongful trading under section 214 of the Insolvency Act 1986.

References

  1. 1 2 http://www.r3.org.uk/media/documents/technical_library/SIPS/SIP%2016%20E&W.pdf%5B%5D
  2. ↑ see, for example, Re DKLL Solicitors [2007] EWHC 2067 (Ch), http://www.bailii.org/ew/cases/EWHC/Ch/2007/2067.html for consideration of these issues
  3. ↑ Re T&D Industries Plc [2000] 1 WLR 646; Re Transbus International Limited [2004] 1 WLR 2654
  4. ↑ Re DKLL Solicitors [2007] EWHC 2067 (Ch), http://www.bailii.org/ew/cases/EWHC/Ch/2007/2067.html
  5. ↑ Re Halliwells LLP [2010] EWHC 2036 (Ch) at para 20 http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Ch/2010/2036.html&query=halliwells+and+LLP&method=boolean
  6. ↑ "Statement of Insolvency Practice 16: Pre-Packaged Sales In Administrations" (PDF). Lucas Johnson. Archived from the original (PDF) on 24 June 2015.
  7. ↑ "Statements of Insolvency Practice: For insolvency practitioners". 7 April 2014.
  8. ↑ "21 IPs reported for pre-pack non-compliance in 2011". 2012-05-15.
  9. ↑ "The Pros And Cons Of Prepackaged Bankruptcy" (PDF). Law 360. Retrieved 28 July 2014.
  10. ↑ Isidore, Chris; Senior, /Money (2005-09-14). "Delta and Northwest airlines both file for bankruptcy". CNN. Retrieved November 17, 2005.
  11. ↑ "3 Tips For Acing A Prepackaged Ch. 11 - Law360". www.law360.com. Retrieved 2016-07-27.
  12. 1 2 Stoll, John D., and Neil King Jr. (July 10, 2009).GM Emerges From Bankruptcy.The Wall Street Journal. Retrieved on July 10, 2009.
  13. ↑ "Obama: GM bankruptcy viable, achievable - Autos- NBC News". NBC News. 31 May 2009. Retrieved 2009-06-01.
  14. ↑ Tkaczyk, Christopher (June 1, 2009). "The 10 Largest U.S. Bankruptcies: From Lehman to Texaco, the Mighty Have Fallen, Taking Down Billions and Billions with Them". money.cnn.com. Fortune. Retrieved June 1, 2009.
  15. 1 2 Stoll, John D., and David McLaughlin (July 2, 2009).General Motors Aims for IPO Next Year.The Wall Street Journal. Retrieved on July 10, 2009.
  16. ↑ Wellard, Mark; Walton, Peter (26 Sep 2012). "A Comparative Analysis of Anglo-Australian Pre-packs: Can the Means Be Made to Justify the Ends?" (PDF). International Insolvency Review. 21 (3): 143–181. doi:10.1002/iir.1201.
  17. ↑ Walton, Peter (2011). "When is pre-packaged administration appropriate? – A Theoretical Consideration" (PDF). Nottingham Law Journal. Nottingham Trent University. 20: 1–13. ISSN   0965-0660.
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