This essay will discuss the practice of pre-pack administration in both united States and United Kingdom. To amplify, features of pre-pack administration will be listed firstly, following by pre-pack situation in both countries, including procedure, aspects related to court, practitioner (trustee) and creditors and specific requirements such the Schedule 31 of Insolvency Act 1984 In UK and section 1129 In US Chapter 1 1 . Then, this article compares the mall features Involved In the pre-pack in two different countries.
In the end, the essay will provide some suggestions in arms of how to draw on the experience of the advantage in two countries' practice. Introduction The usage of pre-packaged administration or pre-pack can be traced back to sass within the administrative receivership in UK, which has become a viable option for the reorganization and was Increasingly adopted during the current recession due to the global financial crisis. Bankruptcy's. Com revealed that since 2009 to 2011, the largest pre-packaged bankruptcy reached more than 80 billion dollars in U.
S and the quickest prepare only lasted for 28 days from going bankruptcy to confirmation of plan. U. S and UK are two countries, in which insolvency laws are well developed including the pre-pack. Both of the word "pre-packaged administration" in UK and "pre-packaged bankruptcy' In US have the similar meanings, which represent the Insolvent company negotiates and agrees the sale of part or all of the asset or business to a third party prior to the formal insolvency procedure and complete the deal shortly after the commencement.
Even though the definition in two countries seems the same, the actual practice of pre-pack in both countries has several different points and will be further discussed. In spite of its popularity from the tactics, pre-pack is also blamed to several Issues Involved. Through comparison of the consideration of pre-pack In two mall law-developed countries, the article will provide some suggestions based on the advantage and characteristics In U. S and K. Features of prepare administration Pre-pack transactions have become increasingly prevalent but highly controversial.
Before discussion about the procedure and difference between pre-pack in two counties, it is necessary to explain some certain features of the pre-pack including its outcomes and concerns associated with It. These basic features can be helpful to understand concept behind the practice of pre-pack In two countries and the suggestion provided. 1 . Reasoning in pre-packaged administration It is correct that pre-pack could be the best choice for some certain insolvent companies, which may have limited size of main creditors and easy to make a deal after negotiation.
Its benefits of pre-pack can be summarized to the chance of finishing the transfer of company without any significant loss on all the aspects including the value of business, the relationship with suppliers and customers and the value of some specific portions of asset can be better preserved. For example, the goodwill becomes extremely fragile when information of insolvency spread in the market. For those companies within the competitive market, Long-time proceeding or liquidation would induce customers find substitute quickly, resulting to a plunge of company's value.
Also, due to short-term administration, the cost may be largely reduced. Compared with other insolvency procedures such as administration and liquidation, pre-pack begins before formal commencement of insolvency, which can help to reduce the loss from risk of default. To be more exact, the main creditors specially the secured creditors are more likely to be engaged in the process of prepare. As a result, those financiers can forbear not to enforce their right before the sale is completed. In addition, "insolvency event" clause is usually included in the contracts with the suppliers and customers.
It empowers the non-defaulting party to terminate the contact when the insolvent company appoints the administrators, liquidators or receiver. The short period to complete plan can reduce the possibility of decrease on the value of the company and price the purchasers willing to pay due to the termination of the default contracts. Because the duty of administrator is to maximize the benefits of all creditors as a whole, they do not care about the issue of employees, which can be important for retaining the good management, when company's problem was not caused by them.
If the companies seem impossible to operate at the going concern basis, those main employee would have no choice but leave the company, which will depress the value of the business. Another crucial concern is about the funding. Insolvent companies may not have enough funding to meet the cost during the procedure, then pre-pack sale become the only choice. For instance, when the Lehman Brothers International (Europe) went to the insolvency procedure, the tough situation of funding required that the administrator look for the recourse to pay the staff salaries at the very beginning.
However, this option is not usually available in the market. 2. Disadvantage associated with pre-pack At the very beginning, a general summary of those concerns was given by the Judge Cooke in the Galleys case, who said: ... The speed and secrecy which give rise to the advantage Lead the directors and the insolvency practitioner to arrive at a solution which is convenient for both of them and their interest.... But which harms the interest of the general creditor...
To be more exact, the Dry Sandra Frisky listed the objections against the argument that pre-pack is an effective and appropriate approach, including the frustration of rights of stakeholders, non-market exposure, lack of transparency, bias to the interest of creditors, practice of "phoenix" and collusion with the purchaser. Following the objection above, the main concern is about the secrecy of the pre-pack transaction, which leads to the issue of transparency. Rights of creditors during the rescue procedure are guaranteed in both US and I-J insolvency law.
However, the pre-pack transactions are exclusively negotiated between debtors and purchasers or may include the main creditors prior to the formal start of insolvency procedure. Thus, it left other creditors limited information and opportunity the Judge whether their rights have been reasonably protected though the pre-pack. The other resentment is that the pre-pack is used to be the tools to let the directors of insolvent company to re-purchasing their company as the auction, the value of the business may not be fairly Judged regardless of how the practitioners are involved to evaluate the value of the company.
Brief speaking, during the pre-pack, bias may happen easily. Debtor may focus on the interest of those main creditors such as the floating charge and secured creditors and neglect the other unsecured creditors. Other concerns include that the debtors have no "breathing" time mandated under the automatic stay. Moreover, if the plan of pre- pack failed after the commencement of procedure, all expensed related to negotiation such as the partitioned fees, was at the expense of the creditors.
Obviously, the benefits of pre-packs attracted the eye of both partitioned and overspent and were taken into the consideration when the Judger made decisions. On the other hand, all critics on its disadvantage are closely related to the current legal practice of pre-pack and provide the potential direction of improvement in the future. I-J Pre-packaged administration 1 . Overview of administration regime Since the Cork Report in 1982, the new principle of the insolvency law in UK transferred to the rescue of business.
Those administration procedures were reflected in the Schedule Bal of Insolvency Act 1986, which were updated by the Enterprise Act 2002. The purpose of administration was required in the Par 3 is to rescue the company as a going concern and achieve a better result for all company creditors as a whole. In I-J, appointment of administrator must initially be made by the court in amended Insolvency Act 1986. However, floating charge creditors and directors of the company now can also appoint the administrator, if some certain circumstances can be achieved.
Traditional administration requires administrator to make proposals followed by voting in the creditor meeting. If it fails to approve, the court may make an order then. The administrator in UK has a wide range of discretion to do the business Judgment and determine the best choice for the companies including saving, sale or winding up when he thinks appropriate subjectively. 2. Treatment of pre-packs The main debate is whether the administrator has the power to dispose the asset of the company prior to the creditor meeting and without the approval form the court.
The origin case should be Re T;D industries, in which the court said: ... Unless there was anything in the administration order to the contrary, the administrator could effect a disposal without leave of the court... It means that under ASS (2) of IA 1986, administrators can manage the affairs of the company including selling asset before the proposal has been approved if court expressed no contrary direction. In Transits International Ltd case, court confirmed that there is no necessity for administrator to get the direction from the court to sell the asset or business of the distress company in advance that their proposal is approved.
After amended by Enterprise Act 2002, this provision was slightly changed to Para 63 ; 68(2), but the Judge believed that the same policy argument applied. The only acquirement is ASS (1) of IA 1986, under which administrator should do all things without prejudice to creditors as a whole. 3. Insolvency Practitioner, administrator and Creditor The UK law requires the administrators to be both the officer of court and the agent fairly. Also, they must perform their function quickly and efficiently. As the agent, they are required to perform their duty in the interests of the creditors as a whole.
For practitioner, UK authorization regime introduced that only individuals recognized in the professional bodies can act as an insolvency practitioner. Joint Insolvency Committee issues the guidance that all practitioners have to comply. The mandatory guidance included Statement of Insolvency Practice and insolvency Code of Ethics. The code established five main principles including integrity, objectivity, professional competence and due care. Any breach will be taken into consideration when assessing their conduct. SIP 16 was published to seek the solution on the protection of creditors' interest in the process of pre-pack.
It admitted that unsecured creditors have little opportunity to consider the sale before it happens. Meanwhile, it required hat practitioners to keep the records of their reason why pre-pack took place, including the extent of involvement prior to appointment, valuation obtained of the business, date of the transaction, detail of asset involved, identity of the purchaser and etc. , which intended to provide the detailed disclosure of information to the creditors. For creditors, according to ASS of Insolvency Act 1986, they can apply to the court if the manner of administrators is unfairly prejudicial to their interest.
Another boarder rule is that creditors have right to challenge the administrator's conduct of many if their interest was harmed. However, it seemed hard in practice. Firstly, the duty of administrator is owed to the company. Therefore, creditors may not sue them directly. Secondly, the standard of care of an administrator in pre-pack is hard to be breached even if the sale was at an undervalued price. In the Charley Davies Ltd Case, the Judge emphasized that court cannot make the decision with the benefit of hindsight.
Thirdly, the information creditors can get is very limited so that it is hard to prove the prejudice of the plan. 4. Wrongful trading provision Regarding to the pre-pack, it may be related to the provision of wrongful trading because at that moment the company has gone into insolvency the pre-pack plan by directors may result to the further loss of the asset of the company, which may result to guilty. However, in terms of pre-pack, subsection (d) can be used as the defense if directors take every step and conclude that the pre-pack transaction is the best option to rescue the company.
Pre-pack in US Chapter 11 1. Overview the chapter 11 Chapter 11 is one part of the U. S bankruptcy code, which concerns the reorganization of insolvent companies mostly. One of its features is directors in procession (DIP), which allows the directors retain their control of the business for 120 days after the date of order for relief. Also, DIP can acquire financing by promising new lenders priority on the earnings. Another feature is the automatic stay, which requires all creditors to stop attempts of collection and makes these post-petition efforts void or avoidable.
More importantly, all reorganization plans have to be proved by the Bankruptcy Court in U. S. The core principle should be S 1129, which provided the requirement when courts confirm the plan of reorganization. According to that section, creditors are divided into impaired class and unimpaired class. Those receive the same value of their interest as what if the companies come to liquidation. However, the court has the right to confirm the plan without the consent of the impaired creditors if the plan does not discriminated unfairly and equitable to each class of creditors, which is named "Crackdown".
Pre-pack is only one strategy of reorganization in the Chapter 11. 2. Pre-pack in U. S First of all, the process of pre-pack is based on either SASS or SSL 123 (b) (4) of bankruptcy code. The former one said that the trustee may sell the property of equines after notice and a hearing. The later one included sale of all or substantially all of the property of the estate as a kind of reorganization plan. Obviously, SASS would be preferred and become prevalent because the plan process is expensive and time consuming and more risky.
This essay will mention the pre-pack under 363 and its requirement and the pre-pack transaction based on the SSL 123 (b)(4) as well. The first reason is that the section 363 requires nothing except from a hearing. Thus, it may be blamed for the violation of SSL 129 that breach the priority of creditors. The second reason is that even though the pre-pack under SSL 123 (b)(4) give up most benefit such the quick speed and cost saving, it includes more options for the creditor protection and information disclosure, which can be a helpful reference for suggestions on pre-pack. . SASS The sale of substantive or all of the business, followed by liquidation is the most welcomed strategy of pre-pack in U. S. Initially, some court refused this kind of sale due to the absence of a confirmed plan and approved disclosure statement. Conversely, the court now began to accept sale of substantially all asset in practice ND focus on the business Justification standard, fair and reasonable price, and adequate and reasonable notice.
The standard changed from the Lionel Case, in which the court reversed the initial order that the sale of debtor's most valuable asset have to be approved by the creditors. Nevertheless, the court also established the rules that the approval of sales under 363(b) should be at existence of the sufficient business reason, including the proportionate value of the asset, the effect of the sale on the future reorganization, the proceeds from the disposal, any appraisals and etc. After that, many other courts applied Lionel case's business justification standard as the reason of approving or denying the sales under SASS.
Also, the court could reject the plan if it thinks the pan is for the purpose of avoiding the whole requirement in Chapter 11 especially the priority rule in SSL 129. However, according to the In re Continental Air Lines case, the court could prove the transaction under SASS, if the creditors are provided some other makeshift protections to substitute for forgone conditions to plan confirmation. These makeshifts can be summarized as Judicial valuation, creditor consent and contested auction. B. One more complicated process of sales is through the plan.
Firstly, the company need negotiate with some certain impaired creditors to solicit their acceptance of the plan it drafted before the filing, because those classes of creditors are deemed to accept the plan if they have accepted it in the pre-bankruptcy stage. Then the debtor file Chapter 11 petition. After that, debtors should solicit the creditor meeting for asking acceptance. If the voting failed in at least one class of creditors, debtors have class of creditors. In the end, the court will conclude whether the whole reorganization plan satisfied all requirements under SSL 129. 3.
Creditor's right for the sale under SSL In U. S pre-pack proceeding, creditors in impaired class can vote against the pre- packaged plan because the court needs to find the voting requirement that have been satisfied. In addition, one creditor still has the right to object the pre-pack plan on several grounds even if all impaired class of creditors have accepted it. 4. Solicitation and Information transparency for the sale under SSL 129(b)(4) The disclosure policies are set in the s 1 126(b), under which the solicitation must be in implicate with requirement of the adequacy of disclosure.
The general standard of disclosure is listed, including debtor' book and record and a hypothetical investor typical of the holder of claim in SSL 125 (a) and the court has the final discretion in determining whether the disclosure statement provided enough information. 5. Change of Chapter 11 In 2005, Bankruptcy Code added SSL 125 (g) to allow the solicitation of votes that was commenced before the petition to continue afterwards. Thus, those creditors unsatisfied with the plan cannot use involuntary petition to stop the voting process anymore.
In the past, Chapter 11 provided the creditor with chance to examine the debtor about its financial affairs including pre-pack sales in the meeting of creditors. However, creditor may no longer use it as their reason for objection on the plan if the solicitation of acceptance happened before the commencement of the case because trustee would not convene a meeting of creditors after petition. Comparison 1. Requirement under insolvency law In U. S, the law provided two ways of sale of business prior to the formal insolvency.
The section 363 seems similar to the regulation on pre-pack in U. K. However, under SSL 126 it provided another way that trustee has to make successful negotiation with different groups of creditors or left those miscellaneous creditor unimpaired by the plan. The essence of this kind of pre-pack is that the solicitation and voting of the creditors are shifted to the date prior to the filing. 2. Role of the court Initially, the role of the court in both two countries is very similar until the Enterprise Act 2002 (I-J).
Within that act, the I-J insolvency regime included the out-of -order administration, which provides the insolvent company another choice to circumvent the involvement of court. However, Bankruptcy Court in U. S is always and ultimately responsible for any stage of the rescue proceeding. For the pre-pack, the I-J adopted the negative method that the practitioners have no need to ask the approval of the pre-pack plan by court if they believe there was a kind of emergent need for commercial purpose. Only when they breach the fiduciary duties owing to creditors, then the court may intervene.
Conversely, one relatively positive method is adopted in US that under both SASS and SSL 126 all pre-packaged bankruptcy has to get the permission through courts like the traditional bankruptcy case. 3. Directors or involvement of supervisor he insolvent company during the reorganization. However, I-J administration procedure requires the director to give up their control and invite the external insolvency practitioner in the proceeding. The practitioner can make suggestion regarding the pre-pack administration and can be appointed as the administrator later.
Therefore, even both countries have the provision to regulate that director should take into accounts the interest of creditors when company is in financial difficulties, the conduct of administrator is separately regulated and monitored by an independent body named Joint Insolvency Committee in I-J. . Creditor protection Although both countries provided several solutions to protect the interest of creditors, it is more likely to say that these creditor protections for pre-pack are week in practice.
In US, the procedure of pre-packaged plan under SSL 126 requires the same voting procedure of a traditional Chapter 11 bankruptcy, which actually involve large amount of protection creditors can choose. However, the company would definitely prefer the pre-pack under SASS. Even the court requires the makeshift of creditor consent, which is similar to SSL 129 (a)(8), the Chrysler Case implied that the rarity rules may be broken under the pre-pack and the solicitation not sufficiently established.
Other reason could be the unimpaired creditors are supposed to be unaffected by the bankruptcy, so they are not included in the voting requirement. However, sometimes the unimpaired treatment may not truly unimpaired so that the interests of creditor may be eroded. The pre-pack in UK has also been blamed to its exploitation of certain types of unsecured creditors. Because the information available to creditors may be very limited, they have little chance to claim on the pre- sack plan if they cannot provide evidence to show the prejudice to their interest. 5.
Valuation In US, the Judicial valuation is included when the court make the decision whether to approve the plan. In I-J, if a practitioner conducts valuation of the sale not at the best price, there is a risk that the deal may be challenged by a subsequently appointed liquidator of the company. This may result in personal liability for him. However, there is no accurate rule about the valuation in both countries and it is complicated to assess the reasonableness in practice. As a result, court may not rely n the valuation alone. 6. Role of government During the recent big pre-pack bankruptcy in U.
S, the government (Treasury) played an important role as endorsing the sale or being the major creditor of the insolvent companies. It may be due to the domestic policy to preserve the main companies of main industry. However, the involvement really affected the validity of the consent requirement by the court through affecting the decision made by other main creditors. While there is no explicit evidence to show the impact of government on pre-pack in I-J, The action of government may resulted to an opposite influence of re-pack at this point.
Suggestion The main concern about the pre-pack is based on the information disclosure, which may lead to the issue of unfairness and prejudice of some unsecured creditors. One of suggestion can be that the practitioners or trustee is required to notice the creditors about the plan in advance and allow them a short period of time such as three or four days to review and challenge it. Alternatively, administrator should and stronger enforcement of transparency and information disclosure can be another choice to protect the potential victims of pre-pack. Another crisis on pre-pack s about Pioneering.
The regulation on the conduct of practitioners and Bankruptcy courts should adopt more restrict investigation on the background of third party or even reject any pre-pack transaction between the new entities with existing directors. It may help to avoid the bias to the interest of creditors. For the creditor protection, the law may involve the requirement that those creditors whose interest was damaged or even excluded due to the pre-pack have to be compensated the same level of return if insolvent companies come to the traditional rescue proceeding or liquidation.
Limitation The issue of legality of pre-pack is not included in the essay. Even it is to be conceded that pre-pack is actually legal under both US and I-J regimes, government may think it provide large advantage for directors while prejudicing some certain creditors. The attitude of government to pre-pack may determine the regulation in the future. The second one is the effect on taxation due to the pre-pack. Pre-pack may get some advantage on the benefit of deferred loss, compared with other types of reorganizations.
This article also excluded the influence of multinational insolvency on the pre-pack. Conclusion It is true that the pre-pack administration can help the insolvent companies to reorganize their capital through sales of their asset quickly and effectively in order to maximize the benefit of creditors as a whole. However, the abuse of pre-pack is normally due to the nature of pre-pack that quick sale may lead to the issue of transparency and adequacy of the fiduciary duty of administrator or trustee on all creditors.
For I-J, Administrator can be in charge of all affairs of the business including pre-pack sales without the permission by court. SIP'S plays important roles to improve the transparency and accountability of the process. Law provided a few options for protect the right of creditor. Therefore, it can be said that the pre-pack system in I-J is not strictly regulated, which is totally different from the procedure of other administration proceeding. For U.
S, Two process of pre-pack included SASS and SSL 126. The trend that pre-pack is more likely to go through SASS and widely supported by court, it may negatively influence the whole Chapter 11 in that the SSL 129 requirement on confirmation of plan may be overridden. Court is crucial factors in the whole process because it can determine whether pre-pack plan can be approved or not. The Bankruptcy Code and Rules provided creditors with sorts of right and protection under pre-pack through SSL 126.
It may be time that the regulators should consider how to balance between the protections the interest of all creditors and promotion of the insolvent companies as going concern. In the end, there is no doubt that public confidence on pre-pack will be improved with the better compliance of the disclosure requirement and equally creditors' protection.