Pre-Pack Administrations - Some Contrarian Considerations
Posted On: 06 September 2010
Author: Iain N.J. Artis
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Iain Artis is a member of Murray Stable Commercial & Insolvency Group and his practice at the Bar leans towards intellectual property, insolvency, tax and commercial law and the law of property. Since 2005 he has been standing junior counsel to the Advocate General for Scotland for HM Revenue & Customs. He has experience of many courts and tribunals, from the First Tier and Upper Tier Tribunals to sheriff courts, the Court of Session and in one of the very first Scottish appeals, the new Supreme Court.
This paper was first presented at an event in June 2010 titled "Pre-Packs & Recent Developments in Corporate Recovery" which was jointly hosted by Murray Stable and R3 Association of Business Recovery Professionals.
Some Contrarian Considerations
A Shakespearian Tragedie
Henry the Fourth, Part II, Epilogue:
"First my fear; then my courtesy; last my speech. My fear is, your displeasure; my courtesy, my duty; and my speech, to beg your pardons. If you look for a good speech now, you undo me: for what I have to say is of mine own making; and what indeed I should say will, I doubt, prove mine own marring. But to the purpose, and so to the venture."
As we shall see, Shakespeare had something to say about pre-pack administration.
My role today is to consider the darker side of pre-packs, addressing the widely-held suspicion that they are ripe for abuse. I shall look at 1) the scope for concern; 2) the nature of concerns; 3) developments; 4) legal restraints on abuse.
The Scope for Concern
Pre-pack administrations, like any other, must comply with the formal requirements of Sch B1 Insolvency Act 1986. But they do pose the risk that the formal requirements may become just that, formal, and that the real deal is done off-stage with only the ethics of insolvency practitioner between the disenfranchised unsecured creditor and those in control.
This is one of the points of difference between UK pre-packs and the American equivalent. Similar commercial benefits are often cited, but the two procedures seem quite unlike. In the US pre-packaged Ch 11 bankruptcy I understand that the court has placed before it the pre-planned reorganisation together with previously obtained acceptances and rejections, and there is oversight of the adequacy of disclosure. The US pre-pack is placed somewhere between traditional Ch 11 bankruptcy and the "workout". Rather than a sale of assets the US pre-pack plan tends to swap debt for equity. The debtor may go to court with the agreement of 90% of creditors. The petition is filed with the plan and a disclosure statement. The US process is more robust in dealing with awkward minorities such as the "vulture funds" seeking to profit with hold-out positions on cheap but valuable debt. It allows these to be defeated by a plan that attracts 2/3 by value and 1/2 in number of those voting in favour.
UK pre-packs, however, do not necessarily come to court. They are not a procedure (yet) contemplated by the Insolvency Act 1986. They are doubly "invisible", not being acknowledged in administration procedures and being worked out in a twilight obscurity where the main actors have real incentives to secrecy. They are the obscure regulated by the invisible.
(Continued.....For full paper please click on the link at the top of this page)