When Is Pre-Packaged Administration Appropriate?-A Theoretical Consideration

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INTRODUCTION

Pre-packaged administration ("pre-pack") has been described 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)

Different policy justifications have been advanced to support pre-packs, including maximising returns, the saving of jobs and the rescue of viable businesses. The disenfranchisement of unsecured creditors does not sit comfortably with some of the policy considerations highlighted by the Cork Committee. (2) We have the benefit of: Professor Frisby's empirical research in the area; (3) existing black letter law including the recent rules on the payment of pre-pack fees; (4) the profession's adoption of Statement of Insolvency Practice 16 ("SIP 16") (5) which requires pre-pack administrators to give full disclosure of the reasons for, and the terms of, the pre-pack deal; judicial recognition of perceived problems with pre-packs; (6) and the views of a large number of academics and practitioners. (7) We also have some political input from the House of Commons Select Committee on Business and Enterprise,8 criticisms highlighted by the Office of Fair Trading, (9) some mostly critical media commentary (10) and the recent consultation carried out by the Insolvency Service on the future regulation of pre-packs ("the Consultation") (11) (as well as the earlier limited Insolvency Service consultation on payment of pre-pack administrators' fees (12)). Still there is no obvious answer as to when a pre-pack is appropriate (if ever).

Although black letter lawyers and practitioners in the UK do not always see the practical use or relevance of legal theory, this is usually because any legal framework being analysed is already in place, and arguing for or against it from a theoretical point of view may be of limited, if any, practical use. In the case of pre-packs, there is, in effect, a blank canvas with which to work. There is little substantive law governing pre-packs per se. It is therefore a unique opportunity for policy makers to consider relevant legal theories in assisting the design of an appropriate legal framework.

This article will examine pre-packs from a theoretical point of view in order to consider how some of the possible theories underpinning insolvency law might apply to pre-packs. It will consider in particular how theories such as those put forward by contractarians (emphasising wealth maximisation and the hypothetical creditors' bargain), communitarians, forum theorists and adherents to a multiple values approach could be applied to a pre-pack scenario and how such application might be used to inform policy in light of the recent Consultation.

PERCEIVED PROBLEMS WITH PRE-PACKS

Although a pre-pack "may offer the best chance for a business rescue, preserve goodwill and employment, maximise realisations and generally speed up the insolvency process", (13) it tends to create discontent within the ranks of a company's unsecured creditors. 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 the company's general creditors. The speed and secrecy of the operation often lead to a deal being executed about which the unsecured creditors know nothing, have no say in and which leaves them empty handed. There is often a suspicion that the consideration paid for the business may not have been maximised 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. SIP 16 requires that unsecured creditors receive better information than before, about why and how the pre-pack was executed, but they only receive this information after the pre-pack has been completed. …

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