Pre‐packin' in the UK

A pre‐pack administration is one where a deal has already been agreed prior to the company entering administration. The company's business will commonly be sold to the incumbent management team immediately the company is placed into administration. The business survives relatively intact but will have managed to jettison its unsecured debt. The business is saved and jobs are saved. The pre‐pack will usually require the support of the company's bankers. Recent research suggests that pre‐packs may constitute between 50% and 80% of all insolvent going concern sales. The UK version of a pre‐packaged administration appears to have been rare until the administration process under the Insolvency Act 1986 was significantly amended in 2002, permitting a company to be placed into administration without a court order. The UK version of pre‐packaged administration does not involve any plan being approved by different classes of creditor nor for the court to be involved in approving activities of the administrator before or after the plan is put into effect. The paper considers whether or not pre‐pack administrations fit into the statutory framework of the Insolvency Act, the professional ethics requirements of being an insolvency practitioner and the equitable rules governing fiduciaries. Some aspects of the policy underpinning pre‐packs are also considered in particular the decision to allow insolvency practitioners to claim pre‐appointment fees as an expense of the administration. This decision appears to herald a change in government policy. This policy change is also considered. Copyright © 2009 John Wiley & Sons, Ltd.     

Dutch corporate insolvency law: On the brink of a revolution?

The Dutch Bankruptcy Code (DBC) has not changed fundamentally over the more than 110 years of its existence, at least as far as corporate insolvency proceedings are concerned. On 1 November 2007, however, a committee of insolvency experts presented a draft for an entirely new code to the Ministry of Justice. Whether this new code will gain the force of law and whether this will happen within the near future remains uncertain but the proposals will in any event dominate discussions on insolvency law in the Netherlands for the foreseeable future. The main goal behind many of the proposals is improving the ability to successfully restructure companies that experience financial difficulties. To this end the proposals include various measures that would weaken the position of (secured) creditors. The proposals include widening the scope of the cooling-off period during which secured creditors are unable to enforce their security by granting the administrator a right of use of assets subject to security interests. The ability to rely on early termination clauses in contracts is also reduced during the cooling-off period. The position of secured creditors is further weakened by a proposal to grant the right to sell assets that are subject to security interests to the administrator if he continues the business. Under the current bankruptcy code, secured creditors can largely ignore insolvency proceedings, there is no general stay on enforcement and, early termination clauses in contracts are generally thought to be valid and enforceable during insolvency proceedings. Although banks have already argued that weakening the position of secured creditors will limit the ability to restructure companies, it seems safe to assume that the relatively comfortable position that secured creditors currently enjoy during insolvency proceedings in the Netherlands will be under fire due to the proposals for a new bankruptcy code. Copyright © 2008 John Wiley & Sons, Ltd.     

‘Pre‐Pack Administration Sale: a Case of Sub Rosa Debt Restructuring’

Under the UK insolvency regime, debt restructuring is ordinarily achievable via a voluntary arrangement, a scheme of arrangement (“scheme”) or a combination of a scheme with administration. 1 However, recently, there has been a growing development of companies using pre‐pack administration sale (“pre‐pack sale”) to effect a debt restructuring under the moniker of a sale of the assets of the company. This article argues that this development poses a genuine danger for the creditors and in particular the junior creditors 2 because such transactions side‐step the protections afforded to the junior creditors in a debt restructuring, particularly a scheme. This article posits that such pre‐pack sales are essentially a sub rosa debt restructuring. 3 Against this backdrop, this article proposes for the use of an ex ante judicial regulatory strategy through the application of the Re Tea Corporation principle to better protect the interest of the junior creditors. 4 Copyright © 2016 INSOL International and John Wiley & Sons, Ltd. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd     

Corporate assets as a trust: for whom are corporate officers trustees in insolvency? the role of incentives in maintaining the trust

Uncertainty is a constant theme when corporations are in financial distress. Yet any successful restructuring of an insolvent corporation requires numerous stakeholders, including creditors, employees and suppliers, repose some degree of trust in those corporate officers who are trying to continue to operate the firm while restructuring it into a viable entity. This article looks at the issue of the positive and negative incentives that can be generated for corporate officers and directors from both their continuing control of corporate assets and their potential personal liability arising from corporate activity both before and after the corporation became insolvent. The potential role these incentives can play in providing a basis for the trust needed to meet the other governance challenges that arise in a restructuring is reviewed in the context of recent developments in Canada concerning the duties of corporate directors to creditors during insolvency. Also reviewed is the role of directors' insurance and indemnification in altering the incentives' effects on directors' behavior. Finally a critical appraisal is given of the present legal regime's provision for compromise of claims against corporate officers during restructuring, as well as the proposal to amend the law to allow complete exoneration of corporate directors from certain liabilities on insolvency. The article urges caution in altering the effects of incentives that may create the necessary basis for trust in the distressed corporation's officers amongst those stakeholders whose co‐operation is crucial to restructuring. Copyright © 2003 John Wiley & Sons, Ltd.     

Insolvency law reform in Australia and Singapore: Directors' liability for insolvent trading and wrongful trading

This article compares reforms to directors' liability for insolvent trading in Singapore and in Australia. We analyse the law in these two countries because they are important Asia‐Pacific trading partners and their laws were originally largely the same—Singapore's law on insolvent trading reflected the law in Australia from the 1960s. However, the law in the two countries has now diverged substantially. The comparison of these two countries therefore represents an interesting case study in how countries differ in their approaches to balancing the competing interests evident in laws that impose personal liability on company directors for insolvent trading. Reform of the prohibition against insolvent trading was a focus of Australia's insolvency law reforms in 2017, which led to the introduction of a safe harbour for directors from liability. Singapore's omnibus insolvency law reforms of 2018–19 include amendments to update Singapore's fraudulent and insolvent trading provisions by introducing a concept of “wrongful trading.” The article finds that there are some areas of convergence between these two jurisdictions when it comes to debates about such provisions but concludes that the different contemporary legislative histories in Australia and Singapore have affected their approaches to reform. Reformers in both jurisdictions have attempted to find an appropriate balance between protecting creditors, discouraging director misconduct, and encouraging entrepreneurship and innovation; however, this comparison suggests that the weight that reformers place on creditor protection compared with the concern that excessive personal liability can make directors unduly risk‐averse is influenced by their existing legislative framework and experience of those laws. Although Australia has shifted away from a strict focus on creditor protection, to give directors more opportunities to engage in restructuring, Singapore's amendments may provide a more creditor‐friendly regime.     

A case of constitutional apples and oranges: a functional comparison of pension priority and benefit guarantees in U.S., U.K. and Canadian insolvency and pension law regimes

Canada's insolvency law reform increased the priority granted to employer‐sponsored pension claims. The article compares the treatment of such claims in the U.S., the U.K. and Canada. A comparison of the legislative provisions concerning pension funding shortfalls from contribution arrears or economic underperformance in relation to the assumptions used for investment income or liability valuations finds that insolvency law has been used to address contribution arrears, but risks from economic underperformance have been addressed by pension benefit insurance. Post‐insolvency priority for contribution arrears provides appropriate incentives to discourage pre‐insolvency preferences for payments to other creditors, while shortfalls from economic underperformance do not involve issues of preference between creditors. The absence of any insolvency rationale for changing priority for shortfalls from economic underperformance and the likely disparity between the assets available to satisfy clams and the much larger amounts of such shortfalls makes the use of insolvency law to address this risk much less effective than insurance. Canada, however, has not adopted the insurance policy instrument used in the U.S. and U.K. to mitigate the impact of pension funding shortfalls. The constitutional inability of Canada to legislate in respect of matters of pension regulation that would allow it to control the well‐known insurance problems of moral hazard and adverse selection may explain why it has only chosen to adopt an insolvency policy instrument. However, a change in priorities in insolvency may generate incentives for secured creditors that either undermine or reinforce this policy choice. Secured creditors could attempt to circumvent the new priority scheme through private arrangements with the debtor or to increase their monitoring activities to ensure the debtor is current in its pension contributions. Secured creditors choices will be influenced by the bankruptcy courts' interpretation of the preference provisions in the insolvency legislation. Copyright © 2009 John Wiley & Sons, Ltd.     

Universalism and the recognition of group proceedings under the UNCITRAL Model Law in Montenegro

Among the most topical insolvency issues in 2017 was the Croatian “Lex Agrokor”—a controversial “tailor‐made” law providing a unique restructuring opportunity for the largest Croatian conglomerate, the parent company of which was otherwise facing bankruptcy. Soon after the “extraordinary administration procedure” began, the appointed administrator started filing motions for the recognition of the alleged group insolvency as foreign insolvency proceedings in a number of neighbouring and other European countries, most of which have adopted the UNCITRAL Model Law on Cross‐Border Insolvency. It was an attempt to save the conglomerate's property from being seized in a disorderly fashion by various secured creditors, most noticeably, the largest Russian financial institution Sberbank, which contested these motions with varying success. This article, however, does not present an effort to comprehensively analyse the ongoing legal battle but rather adopts a broader approach to examining the Lex Agrokor to establish grounds for more general conclusions. More precisely, the purpose of this article is twofold. First, to offer strong arguments that, from the standpoint of typical insolvency legislation based on the Model Law, such as that of Montenegro, both the actual and future group proceedings initiated under the Lex Agrokor should fail to meet recognition requirements. Second, based on the preceding case study, to offer conclusions on how to further promote universal approach regarding group insolvencies by emphasizing exactly what the national laws regulating group insolvency should not feature so as to have the proceedings introduced therewith recognized in countries adopting the Model Law.     

Aspects of tax pertaining to insolvency law in South Africa

This paper seeks to briefly analyse the somewhat convoluted provisions contained in South African tax legislation that apply to insolvent entities in South Africa. While South Africa has modern and effective taxation laws, the provisions, when applied to insolvent entities, are often exposed as cumbersome and ineffective. Tax legislation in South Africa does not take proper cognisance of the unique nature of insolvency, often placing a heavy burden on the trustee or liquidator who is required to administer the estate as speedily and effectively as possible. In addition, there are different rules that apply to consumer and corporate insolvency regarding the assessment of income tax pre‐ and post‐liquidation. The recent introduction of a capital gains tax has placed an additional burden on insolvency practitioners, especially considering the lack of clarity as to how these provisions should be applied in practice. Although the Value‐Added Tax Act was introduced more than a decade ago, its provisions continue to pose problems for insolvency practitioners during the administration process of insolvent estates. Despite these difficulties, the South African revenue authorities are to be lauded for the sensible manner in which problems are addressed in practice. Copyright © 2005 John Wiley & Sons, Ltd.     

Preference Transaction Avoidance in Ghana: Has the Liquidator's burden changed?

Financially distressed companies sometimes conceive plans to pay off certain creditors before petitioning the Court for winding up. This last‐minute payment referred to as a preference transaction puts the preferred creditor in a better position than the rest of the company's creditors because the distressed company may not have enough assets to satisfy everyone. Insolvency law frowns on such last‐minute transactions and provides the Liquidator with the power to avoid these transactions, to restore the asset to the company and distribute it to all the creditors. Preference avoidance forms an integral part of the corporate insolvency law in Ghana. These principles founded upon the common law of England are now provided for under the Bodies Corporate (Official) Liquidation Act 1963 (Act 180) of Ghana. This essay discusses preference avoidance under Ghanaian law. It also examines a recent judicial application of the law and finally suggest avenues for reform.     

Determining the insolvent estate – A comparative analysis

This article is part of a comparative research project in which the provisions of several different jurisdictions concerning the determination of the insolvent estate are examined. In particular, this part of the project examines those provisions which enable the administrator of the insolvent estate to seek to increase the size of the estate by (a) setting aside pre‐insolvency transactions and (b) seeking compensation from those who allegedly were negligent or fraudulent in the management of the debtor prior to the onset of the latter's insolvency. The overall purpose of the research study is to establish a basis for the possible substantive harmonization of the different provisions in those countries, which constitute the European Union. Copyright © 2011 John Wiley & Sons, Ltd.     

A Comparative Analysis of Anglo‐Australian Pre‐packs: Can the Means Be Made to Justify the Ends?

Whereas pre‐packaged administrations have been prevalent in the UK for years, Australia's voluntary administration regime has been more restrictive of the practice. This article analyses the evolution of UK pre‐packs, why UK‐style pre‐packs are not prevalent in Australia and the challenges for UK and Australian lawmakers in striking the right balance with pre‐packs in their respective administration regimes. Building upon this analysis, the article proposes a mechanism that might make ‘connected‐party’ pre‐pack business sales work more fairly for stakeholders—that is, by obligating a connected‐party purchaser to make a future‐income contribution in favour of the insolvent company whose business has been ‘rescued’ by a pre‐packaged sale in administration. Copyright © 2012 INSOL International and John Wiley & Sons, Ltd.     

The Use of Noncourt‐Based Corporate Rescue: Does the Australian Voluntary Administration Procedure Provide a Model for China?

In the recent international history of insolvency law reform, the reform of corporate rescue and restructuring has been an ongoing project. In China, the enactment of the Enterprise Bankruptcy Law 2006 saw the introduction of a bankruptcy reorganisation procedure that incorporates the debtor‐in‐possession model found in Chapter 11 of the US Bankruptcy Code. However, the Chinese corporate rescue procedure has been significantly underused due in part to various drawbacks associated with this court‐based and highly politicalised process. This paper explores the possibility of reforming China's current corporate rescue regime by drawing upon the Australian voluntary administration procedure. Found in Part 5.3A of the Corporations Act 2001 (Cth), this procedure was designed to provide a relatively swift, inexpensive and flexible corporate rescue mechanism for companies in financial distress. It comprises a noncourt based mechanism under the control of one or more professionally qualified private administrators. It is interesting to note that the UK also moved away from exclusive reliance upon court‐based administration procedures following the passage of the Enterprise Act 2002. This moved the UK closer to the Australian practitioner‐dominated approach to corporate rescue. This paper argues that the addition of a voluntary administration‐style procedure to China's current corporate rescue regime may be needed as China develops its market economy based on the rule of law. Copyright © 2017 INSOL International and John Wiley & Sons, Ltd     

Role of Insolvency Practitioners in the UK Pre‐pack Administrations: Challenges and Control

The pre‐pack administrations (‘pre‐packs’) in the UK have repeatedly been criticised for allowing the exploitation of certain types of unsecured creditors. In this context, the role of the administrators (who are qualified insolvency practitioners) is one of the key elements. This article examines the new challenges brought by the pre‐pack strategy to the conventional role of insolvency practitioners as the administrators. It suggests that the pre‐determination nature of pre‐packs is likely to make the administration proceedings less manager‐displacing in practice than the formal rules would suggest. Although this tendency can be expected to facilitate information gathering during the rescue negotiations, it raises urgent questions with respect to the potential alignment of interests between the inside players that may impair the impartiality of the administrators. In response to such challenges, the article argues that, in spite of the recent proposals of introducing drastic statutory regulation to control the controversy of the pre‐pack practice, a proportionate way is to see how the existing control mechanisms can contribute more in reinforcing the independence of administrators. Copyright © 2012 John Wiley & Sons, Ltd.     

Transposing the preventive restructuring directive 2019 into French insolvency law: Rethinking the role of the judge and rebalancing creditors' rights

In June 2019, the European Union adopted the Directive on Preventive Restructuring Frameworks. The objective of the Directive is to introduce a level‐playing field across all Member States in the area of pre‐insolvency restructuring. Member States have until 2021 to transpose the Directive into their domestic insolvency regimes. In April 2019, the French legislator adopted the “Pacte Law”, whose aim is, inter alia, the transposition of the European Directive on Preventive Restructuring. Although five preventive restructuring tools already exist in the French regime, the transposition of the Directive will have an impact on current restructuring practices as it will require: (i) rebalancing the involvement and role of judicial authorities in preventive restructuring proceedings; and (ii) rebalancing the involvement of, and protection granted to, creditors.     

Tripping the Light Fantastic: A Comparative Analysis of the European Commission's Proposals for New and Interim Financing of Insolvent Businesses

The European Commission published a Draft Directive in November 2016, with the aim of ensuring that all Member States have in place an effective mechanism for dealing with viable, but financially distressed, businesses. The Draft Directive includes provisions designed to encourage financing for the debtor company, both interim financing to ‘keep the lights on’ for a brief period while the debtor negotiates with its creditors for a resolution to its financial distress, and, where possible, to finance implementation of a restructuring plan, called ‘new financing’ in the Draft Directive. Creating such a financing regime is a complex and difficult issue, as the law's intervention in this area often involves constraints on the rights of existing creditors, requiring that a careful balance is maintained between existing creditors' rights and the rights of the interim financier. This article examines the underlying policy rationale and benefits of having new and interim financing available to financially distressed debtor companies and discusses the risks involved. It examines the EU Commission's proposals in light of the experience of jurisdictions that have already tackled these issues, notably the USA and Canada, or have developed a market‐based solution to this problem, such as the UK. While the European Commission's wish to include such measures in its restructuring proposals is laudable, the measures as drafted raise concerns, particularly regarding risks associated with priority for the grantors of such finance. The authors suggest that there are four fundamental aspects of such financing on which the Directive could give guidance to Member States, namely, effective notice to pre‐filing creditors, thresholds for the debtor to qualify, a menu of relevant criteria to balance benefit and prejudice, and a role for the court in resolving disputes, ensuring fairness to stakeholders, and serving as an accountability check on interim financing arrangements, all aimed at maintaining the integrity of the insolvency process. Copyright © 2018 INSOL International and John Wiley & Sons, Ltd.     

Does pre‐packed bankruptcy create value? An empirical study of postbankruptcy employment retention in The Netherlands

In recent years, there has been growing interest in whether pre‐packed bankruptcy can be a mechanism through which firms facing imminent insolvency can preserve value. Although an extensive body of literature exists on “pre‐packs,” whether such techniques really preserve value remains ambiguous. By analysing bankruptcy proceedings filed with Dutch courts in the period 2012–2018 through the lenses of real options and debt overhang theory, we examined employment retention postbankruptcy as a consequence of the type of bankruptcy proceeding (pre‐packed bankruptcy and conventional bankruptcy) and the severity of prebankruptcy financial distress. The results show that in the Netherlands, a pre‐packed bankruptcy, when compared with a conventional bankruptcy proceeding, positively impacts employment retention rates after bankruptcy. The severity of financial distress before bankruptcy does not affect employment retention rates postbankruptcy. This implies that despite the amount of resource slack, the preservation of employee value is better served under a pre‐packed bankruptcy than a conventional bankruptcy proceeding. This finding is important for insolvency practice, as up to 22 June 2017, employee rights in the Netherlands (including redundancy) were not considered to be automatically transferred to the firm acquiring the bankrupt debtor's assets when a pre‐packed bankruptcy was applied. Implications for insolvency regulation and practice are discussed.     

The European Union preventive restructuring framework: A hole in one?

While traditionally (Continental) Europe has not been known for an in particular debtor‐ or restructuring‐friendly insolvency practice, in recent decades, important reforms were implemented that would foster restructurings in Europe. In this article, we comparatively look a the status quo of insolvency and restructuring practice in five different European countries (Denmark, France, Germany, Netherlands, UK). We place our observations into the context of the preventive restructuring directive, to be implemented within the next two years after its publication on 26 June 2019. The directive leaves quite some room implementation, from a watered‐down restructuring tool with high access threshold to a pre‐insolvency debtor‐friendly US‐style restructuring procedure.     

Individual voluntary arrangements: A ‘fresh start’ for salaried consumer debtors in England and Wales

Since the mid‐1990s the number of consumer insolvencies in England and Wales has grown exponentially. The UK's Insolvency Act 1986 offers two formal responses to personal insolvency: bankruptcy and individual voluntary arrangements (‘IVAs’). While consumers have used both these debt relief mechanisms in increasing numbers in recent years, IVAs—regulated agreements between debtors and creditors facilitated by a licensed insolvency practitioner, usually taking the form of a 5‐year payment plan—grew faster than bankruptcies between 2003 and 2006. However, the level of new IVA approvals fell back in 2007 and the first half of 2008. This article charts the transformation of the IVA from a bankruptcy alternative originally designed for insolvent traders and professionals into a tool of consumer debt relief. It then seeks to explain both the stellar rise in IVA usage among consumer debtors and the subsequent stalling of IVA growth. The rise of consumer IVAs can be attributed largely to supply side changes in the market for debt resolution—in particular the emergence of volume providers commonly referred to as ‘IVA factories’—while a sustained backlash against the procedure and the providers instigated by institutional creditors demanding higher recoveries accounts for the subsequent decline in approvals. The article concludes by considering the near‐term prospects for consumer IVAs within the context of the increasingly complex UK debt resolution market. Copyright © 2009 John Wiley & Sons, Ltd.     

The effectiveness and efficiency of corporate insolvency law—part two

Little empirical research has been done in the Netherlands (or internationally) into the effect of corporate insolvency proceedings. The Dutch legislature has made several attempts in the past decades to revise the current Dutch Bankruptcy Act (Faillissementswet) of 1893, while almost nothing is known about the effectiveness and efficiency of the Dutch corporate insolvency law. I have studied the effectiveness of the current Dutch insolvency law and of European Directive 2001/23/EC which is incorporated in this law, on the basis of theoretical and large‐scale empirical research. The study concerned all 4167 of the corporate insolvencies that ended in 2004. In the first part of this Article (International Insolvency Review, Volume 17, 3, Winter 2008, pp. 189–209), the research results showed that the Dutch Bankruptcy Act achieved the goals set on it only to a limited degree and that the informal restructuring procedure is of great social importance. In this second part, I concentrate on the conditions imposed by European Directive 2001/23/EC on the European national legislatures to protect employees' rights: automatic transfer of employment contracts in the event of transfers as part of insolvency proceedings, together with measures to prevent misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in this European Directive. The study shows that, in the Netherlands, not applying automatic transfer of employment contracts when an undertaking or business is transferred as part of an insolvency proceeding does not result in large‐scale misuse of insolvency law. It appears that automatic transfer of employment contracts outside insolvency proceedings can actually impede the informal restructuring of financially unsound companies. These surprising results are interesting for corporate insolvency proceedings worldwide. Copyright © 2009 John Wiley & Sons, Ltd.     

Toward a New Corporate Reorganization Paradigm

Chapter 11 is becoming an increasingly flexible, market‐driven forum for determining who will become the owners of financially troubled enterprises. With increasing frequency, distressed companies are sold in Chapter 11 as going concerns. At the same time, distressed investors, including hedge funds and private equity investors, are actively trading the debt of such companies in much the same way that equity investors trade the stock of solvent companies. Market forces drive the troubled company's debt obligations into the hands of those investors who value the enterprise most highly and who want to decide whether to reorganize or to sell it. One way or the other, the Chapter 11 process is used to effect an orderly transfer of control of the enterprise into new hands, whether the creditors themselves or a third party. But if the market‐oriented elements of this new reorganization process promise to increase creditor recoveries and preserve the values of corporate assets, other recent developments could present obstacles to achieving these goals. In particular, the increased complexity of corporate capital structures and investment patterns—including the issuance of second‐lien debt and the dispersion of investment risks among numerous parties through the use of derivatives and other instruments—threatens to increase inter‐creditor conflicts and reduce transparency in the restructuring process. These factors, coupled with provisions added to the Bankruptcy Code that selectively permit “opt‐out” behavior by favored constituencies, could interfere with the ability of troubled companies to reorganize as the next cycle of defaults unfolds.