10
Pre-packaged administrations
In chapter 6 it was argued that, over recent years, responses to corporate troubles have increasingly tended to be made before any final crisis precipitates formal action. One form of anticipatory action is the prepackaged administration. This is a device that has been encountered on the UK insolvency scene since the mid-1980s but which has grown in use more recently. It is a device that some commentators herald as a freshly effective mechanism for furthering rescue objectives and others see as a means by which powerful players can bypass carefully constructed statutory protections.1
The ‘pre-pack’ is a process in which a troubled company and its creditors conclude an agreement in advance of statutory administration procedures.2 This has the effect of establishing a deal in advance of the appointment of an administrator and it allows statutory procedures to be implemented at maximum speed. The danger most commonly pointed to is that such speedy implementations of faits accomplis will tend to ride roughshod over the procedural and substantive interests of less powerful creditors.
This chapter looks at the development of the pre-pack, identifies the issues raised by this device, and considers how insolvency law might respond to the burgeoning popularity of such agreements. A particular
1See e.g. S. Harris, ‘The Decision to Pre-pack’ (2004) Recovery (Winter) 26; M. Ellis, ‘The Thin Line in the Sand’ (2006) Recovery (Spring) 3; J. Moulton, ‘The Uncomfortable Edge of Propriety – Pre-packs or Just Stitch-ups?’ (2005) Recovery (Autumn) 2; S. Frisby, A Preliminary Analysis of Pre-packaged Administrations: Report to R3 – The Association of Business Recovery Professionals (R3, London, August 2007) (‘Frisby, R3 Analysis’); L. Qi,
‘The Rise of Pre-packaged Corporate Rescue on Both Sides of the Atlantic’ (2007) 20 Insolvency Intelligence 129; P. Walton, ‘Pre-packaged Administrations – Trick or Treat?’ (2006) 19 Insolvency Intelligence 113; V. Finch, ‘Pre-packaged Administrations: Bargains in the Shadow of Insolvency or Shadowy Bargains?’ [2006] JBL 568 (upon which this chapter builds).
2Pre-packs have historically been used in relation to receiverships but are increasingly employed in conjunction with administrations. This chapter focuses on administrationrelated pre-packs.
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concern will be whether the advent of the pre-pack calls for a rethinking of current approaches to the protection of those interests that are affected by corporate troubles.
The rise of the pre-pack
In the United States, pre-packaged bankruptcy filings first emerged in the mid-1980s and rapidly grew in popularity in the early 1990s, so that by 1993 over 20 per cent of all public bankruptcies were pre-packaged.3 A common arrangement involves a troubled company seeking to trade debt for equity in order to shed the burdens of onerous interest payments. In order to make a pre-pack work the debtor will require the agreement to an arrangement of a significant majority of creditors (often around 90 per cent). The company then makes a Chapter 11 filing. The advantage gained is that, in a pre-pack plan, negotiations, distributions of disclosure statements and voting all take place before the bankruptcy case is filed in court.4 The debtor typically files not only a petition but also a plan and a disclosure statement. Such ex ante approval from creditors often allows the court to hold a single hearing to determine the adequacy of pre-petition disclosure and whether the plan should be confirmed. As a result, the company will frequently emerge from statutory proceedings quickly (sometimes in thirty to thirty-five days rather than years, as is common in conventional Chapter 11 proceedings).5
3 See Managing Credit, Receivables and Collections, (2003) March issue, p. 1. In 1995 a quarter of all Chapter 11 cases of public corporations involved a pre-pack: see V. Vilaplana, ‘A Pre-pack Bankruptcy Primer’ (1998) 44 The Practical Lawyer 33. The pre-pack has been said to be the single most important development in US corporate bankruptcy practice in recent years, so that it has now become routine and the strategy of choice for corporations with complicated financial structures: see D. A. Skeel, Debt’s Dominion (Princeton University Press, Princeton, 2001), quoted in P. Cranston (Eversheds LLP), ‘Pre-packaged Business Disposals: White Knight or Thief in the Night?’, presentation to ILA Annual Conference, Bath, 18 March 2006.
4See Vilaplana, ‘Pre-pack Bankruptcy Primer’; M. Plevin, R. Ebert and L. Epley, ‘Prepackaged Asbestos Bankruptcies: A Flawed Solution’ (2002) 44 South Texas L Rev. 883, 888.
5The US Bankruptcy Code Chapter 11 is a reorganisation procedure whose policy objective is strongly oriented to the avoidance of the social costs of liquidation and the retention of the corporate operation as a going concern. On Chapter 11 generally see ch. 6 above; R. Broude, ‘How the Rescue Culture Came to the United States and the Myths that Surround Chapter 11’ (2001) 16 IL&P 194. Note, however, that the Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA) has tightened up timescales regarding Chapter 11 plans: see revised s. 1121(d) of the Bankruptcy Code (capping the debtor’s exclusive right to file a plan at eighteen months and the exclusive
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Adverse and lengthy negotiations with creditors are often avoided and professional fees are far less than would be the case without the pre-pack. In many instances, argue advocates of pre-packs, employees’ jobs will be protected and trade creditors will be paid in full. Pre-packs, moreover, can be agreed long before financial difficulties are encountered. This means that the company has the resources to continue operating in an effective manner.
In the UK, pre-packaging will typically involve a pre-agreed restructuring deal and the appointment of an office holder – either an administrator or an administrative receiver.6 This individual will then execute the restructuring transaction on behalf of the troubled company.7 A corporate restructuring director at Ernst & Young LLP has summarised the appeal of the pre-pack: ‘In a pre-pack the restructuring process is condensed and offers the secured creditors a high level of control and certainty, making it a very attractive alternative to any protracted formal insolvency process.’8
The pre-pack has grown in popularity in the UK in parallel with the growth in ‘live side’ or ‘pre-insolvency’ approaches to corporate troubles.9 It has come to serve an important role in contingency and recovery planning as ‘the divide between informal and formal [insolvency] continues to blur’.10 The process has accelerated in use, most
right to solicit acceptances to the plan at twenty months). On BAPCPA see further A. Kornberg, ‘The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 – A Primer on Those Changes Affecting Business Bankruptcies’ (2006) 3 International Corporate Rescue 33.
6 See e.g. Harris, ‘Decision to Pre-pack’. The Enterprise Act 2002 reforms prohibit (subject to stated exceptions) the use of administrative receivership by the holders of qualifying floating charges: see now ss. 72B–72G of the Insolvency Act 1986. Transactions that predate the implementation of EA 2002 still allow holders of qualifying floating charges both to appoint administrative receivers and to block the appointment of an administrator: see ch. 8 above.
7The pre-pack may be instituted and driven by a variety of parties: senior debt providers; Insolvency Practitioners (IPs) and advisers to distressed companies; specialist funds; bargain hunters; MBO teams; or groups/companies themselves: see Cranston, ‘Prepackaged Business Disposals’.
8Harris, ‘Decision to Pre-pack’, p. 27.
9See chs. 6 and 7 above. Katz and Mumford found that in 2004, a pre-pack was involved in 44 per cent of cases in which rescue was an objective of proposals for an administration: see A. Katz and M. Mumford, Report to the Insolvency Service: Study of Administration
Cases (Insolvency Service, London, 2006). Orbis, the council house cleaner listed on AIM, is an example of a recent pre-packaged administration: see P. Davies, H. Sender and C. Hughes, ‘Management Rescue Orbis in “Pre-pack” Sale’, Financial Times, 5 February 2008.
10 Harris, ‘Decision to Pre-pack’, p. 26.