Pre-Packaged Administration between the U.S. Essay Example

compare the approach to pre-pack in the United States and the United Kingdom, both well-developed legal systems, and offer suggestions based on their advantages and characteristics. The features of pre-pack administration transactions have gained popularity but are still highly controversial.

Before exploring the procedure and disparities of pre-pack in two nations, it is crucial to clarify specific aspects of pre-pack. This encompasses its results and associated concerns. Grasping these fundamental features can aid in comprehending the rationale behind the implementation of pre-pack in both countries and the recommended approach.

1. Logic behind pre-packaged administration: It holds true that pre-pack may be favored as an option for financially troubled companies with a small number of significant creditors and where reaching a deal through negotiations is readily attainable.

The advantages of pre-pack can be summarized as the ability to complete a company transfer without significant losses in various aspects. This includes the overall business value, relationships with suppliers and customers, and preservation of specific asset portions. The fragility of goodwill is a prime example, as insolvency information can quickly damage its reputation in the market. Companies in competitive markets would experience a decline in value if the transfer process takes a long time or leads to liquidation, as customers would seek alternative options promptly.

Moreover, the cost of pre-pack can be significantly reduced due to its short-term administration. Pre-pack, which starts before formal insolvency procedures like administration and liquidation, helps minimize the loss from default risks. Specifically, the main creditors, particularly secured creditors, are actively involved in the preparation process. This allows them to hold off on enforcing their rights until the sale is finalized. Furthermore, contracts

with suppliers and customers often include an "insolvency event" clause.

The non-defaulting party is given the power to end the contract when the insolvent company appoints administrators, liquidators, or a receiver. The limited time frame for carrying out a plan can minimize any decrease in the company's value and the price that potential buyers are willing to pay, resulting from terminating default contracts. Administrators have a duty to maximize the benefits of all creditors collectively and may not consider the importance of employees in maintaining good management, especially when the company's issues were not caused by them.

If companies cannot operate on a going concern basis, their main employees may have no option but to leave, which would decrease the value of the business. Another important issue is funding. Insolvent companies may not have sufficient funds to cover costs during the process, making pre-pack sales the only choice. A prime example is when Lehman Brothers International (Europe) underwent insolvency proceedings; the challenging funding situation necessitated the administrator seeking alternative means to pay staff salaries from the start.

However, this option is not usually available in the market. One disadvantage associated with the pre-pack is that the speed and secrecy which contribute to its advantage can lead directors and insolvency practitioners to arrive at a solution that is convenient for them, but harms the interests of general creditors. In the Galleys case, Judge Cooke summarized these concerns.

In her critique, Dry Sandra Frisky presents various objections to the claim that pre-pack is a viable and suitable approach. These objections include the violation of stakeholder rights, non-market exposure, lack of transparency, bias towards creditors' interests, the "phoenix"

practice, and collusion with purchasers. The primary concern arising from these objections revolves around the secrecy surrounding pre-pack transactions, which gives rise to transparency issues. However, both US and UK insolvency laws ensure that creditors' rights are protected during the rescue process.

However, pre-pack transactions are exclusively negotiated between debtors and purchasers or may involve the main creditors before the formal start of the insolvency procedure. Therefore, this leaves other creditors with limited information and opportunities to judge whether their rights have been reasonably protected through the pre-pack. Another concern is that pre-pack transactions are often used as a tool for directors of insolvent companies to repurchase their businesses without going through an auction. As a result, the value of the business may not be fairly judged, regardless of the involvement of practitioners in evaluating its worth.

In summary, bias may easily occur during the pre-pack process, where the debtor may prioritize the interests of main creditors like floating charge and secured creditors, overlooking other unsecured creditors. Another concern is that debtors do not have a mandated "breathing" time provided by the automatic stay. Furthermore, if a pre-pack plan fails after the procedure begins, all expenses related to negotiations, such as partitioned fees, are borne by the creditors.

Clearly, both partitioned and overspent individuals were attracted to the benefits of pre-packs, which factored into the Judger's decisions. However, critics have closely connected all disadvantages of pre-pack to the current legal practice and offer potential improvements in the future. I-J Pre-packaged administration 1 . Overview of administration regime Since the Cork Report in 1982, the UK's insolvency law has focused on rescuing businesses.

The administration procedures

outlined in the Schedule Bal of Insolvency Act 1986 were modified by the Enterprise Act 2002. The aim of administration, as stated in Par 3, is to save the company from insolvency and achieve a more favorable outcome for all creditors. In the UK, the appointment of an administrator must first be authorized by the court under the amended Insolvency Act 1986. However, in certain situations, floating charge creditors and company directors are now also able to appoint an administrator.

The traditional method of administration entails the administrator putting forth proposals and organizing a meeting for creditors to vote on them. If the proposals are not accepted, the court may issue an order instead. In the UK, administrators have considerable flexibility in making business decisions and determining the most beneficial course of action for the company, such as rescuing it, selling it, or liquidating it, based on their personal assessment. The handling of pre-packs is a significant subject of debate concerning whether administrators possess the power to dispose of company assets prior to the creditor meeting without court authorization.

The court case that establishes the origin of this rule is Re T;D industries. In this case, the court stated that unless specified otherwise in the administration order, administrators have the authority to dispose of assets without seeking permission from the court. This means that administrators, under section 2 of the Insolvency Act 1986, can manage the company's affairs and sell assets before their proposal is approved, as long as the court does not express any contrary direction. The court further confirmed this in the Transits International Ltd case, ruling that administrators are not required to

seek court direction before selling assets or the distressed company's business prior to their proposal being approved.

After being amended by the 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 requirement is ASS (1) of IA 1986, under which the administrator should do all things without prejudice to creditors as a whole. In the UK, administrators are required to be both officers of the court and agents fairly. They must also perform their functions quickly and efficiently while fulfilling their duties in the interests of the creditors as a whole.

The UK authorization regime for insolvency practitioners states that only individuals recognized in professional bodies can serve as insolvency practitioners. The Joint Insolvency Committee has issued mandatory guidance that all practitioners must adhere to. This guidance includes the Statement of Insolvency Practice and the insolvency Code of Ethics. The code outlines five main principles, which are integrity, objectivity, professional competence, and due care. Any breach of these principles will be considered when assessing a practitioner's conduct. SIP 16 was published to address the protection of creditors' interests in the pre-pack process.

The text acknowledges that unsecured creditors have limited chances to review a sale before it occurs. However, it mandates that practitioners document the reasons for opting for a pre-pack, such as their level of involvement prior to their appointment, the business valuation they obtained, the transaction date, the assets involved, and the purchaser's identity. These requirements aim to offer creditors comprehensive information disclosure. Additionally, under the ASS of Insolvency Act 1986, creditors are permitted to seek legal

recourse if they feel that administrators' actions unfairly harm their interests.

Another rule regarding boarders is that creditors possess the right to contest the actions of administrators if their interests were negatively affected. However, this proved to be challenging in reality. Firstly, administrators' obligations are owed to the company, thus creditors are unable to sue them directly. Secondly, it is difficult to establish a breach of the standard of care for administrators in pre-pack situations, even if the sale occurred at a price below market value. In the Charley Davies Ltd Case, the Judge emphasized that decisions cannot be made by the court with the advantage of hindsight.

The limited information available to creditors makes it difficult to prove any prejudice caused by the plan. Additionally, the provision of wrongful trading may be applicable to pre-pack situations, as the directors' implementation of a pre-pack plan during insolvency could potentially lead to further loss of company assets and result in guilt. However, in the case of pre-pack transactions, directors can use subsection (d) as a defense if they can demonstrate that they have taken all necessary steps and determined that the pre-pack transaction is the optimal choice for saving the company.

Chapter 11 in the US bankruptcy code deals with the reorganization of financially troubled companies. It includes a provision called directors in procession (DIP) that allows company directors to retain control of the business for 120 days after filing for bankruptcy. The DIP also has the ability to secure financing by giving new lenders priority on earnings. Additionally, Chapter 11 includes an automatic stay, which prohibits creditors from attempting to collect debts and renders any post-petition

collection efforts void or avoidable.

Approval of reorganization plans by the United States Bankruptcy Court is crucial. The key principle to adhere to is S 1129, which sets out the criteria for court confirmation of a reorganization plan. It categorizes creditors as impaired or unimpaired, with both groups receiving equivalent value for their interest as in liquidation. However, if the plan does not unfairly discriminate against any class of creditors, known as "Crackdown", the court can confirm it without consent from impaired creditors.

The use of pre-pack is a reorganization method in Chapter 11, with procedures based on either SASS or SSL 123 (b) (4) of the bankruptcy code in the United States. SASS enables the trustee to sell equine properties after notification and a hearing, while SSL 123 (b) (4) allows for the sale of most or all estate properties as part of a reorganization plan. SASS is the preferred choice due to its cost-effectiveness, time-saving benefits, and lower risk level.

This essay will discuss the pre-pack under section 363 and its requirements, as well as the pre-pack transaction based on SSL 123 (b)(4). The first reason is that section 363 only requires a hearing, which can be seen as a violation of SSL 129 and breach the priority of creditors. The second reason is that the pre-pack under SSL 123 (b)(4) may give up certain benefits like speed and cost savings, but it provides more options for creditor protection and information disclosure, making it a useful reference for suggestions on pre-pack. SASS The sale of the business, followed by liquidation, is a popular pre-pack strategy in the U.S. Initially, some courts rejected this

kind of sale due to the absence of a confirmed plan and approved disclosure statement. However, courts now accept the sale of substantially all assets and focus on standards such as business justification, fair and reasonable price, and adequate and reasonable notice.

The standard for approving the sale of a debtor's most valuable asset was changed by the Lionel Case. In this case, the court reversed the initial order that required creditors to approve the sale. The court also established rules for approving sales under Section 363(b), stating that there must be a sufficient business reason, which includes considering the proportionate value of the asset, the impact of the sale on future reorganization, the proceeds from the disposal, and any appraisals. Following the Lionel Case, many other courts have used this business justification standard to determine whether to approve or deny sales under Section 363(b).

Moreover, the court has the authority to reject the plan if it believes that the purpose of the plan is to evade the requirements outlined in Chapter 11, specifically the priority rule in SSL 129. However, based on the In re Continental Air Lines case, the court can approve the transaction under SASS if alternative measures are provided to creditors in order to replace any conditions that were not fulfilled for plan confirmation. These measures include Judicial valuation, creditor consent, and contested auction. Additionally, another complex method of sales is through the plan.

Firstly, the company must negotiate with specific impaired creditors to seek their acceptance of the plan before filing for bankruptcy, as those particular creditors are considered to have accepted the plan if they agreed to it prior

to the bankruptcy. Afterward, the debtor files a Chapter 11 petition. Following the filing, the debtors should arrange a creditor meeting in order to request acceptance. If the voting fails in at least one class of creditors, the debtors will have a class of creditors. Ultimately, the court will determine whether the entire reorganization plan satisfies all requirements under SSL 129. 3.

The creditor's right to sell under SSL in U.S. pre-pack proceedings allows creditors in an impaired class to vote against the pre-packaged plan if the court determines that the voting requirement has been met. Furthermore, even if all creditors in the impaired class have accepted the plan, one creditor still has the right to object to the pre-pack plan on various grounds. Additionally, the solicitation and information transparency for the sale under SSL 129(b)(4) is regulated by disclosure policies outlined in section 1126(b), which require solicitation to conform to the standards of adequate disclosure.

The general standard of disclosure, which includes the debtor's book and record and a hypothetical investor representing the claim holder in SSL 125 (a), is listed. Furthermore, the court has the ultimate authority in determining whether the provided disclosure statement contains sufficient information.

In 2005, a change was made to Chapter 11 of the Bankruptcy Code with the addition of SSL 125 (g). This amendment allows for the solicitation of votes to continue after the initiation of a petition. As a result, creditors who are dissatisfied with the plan can no longer use an involuntary petition to halt the voting process.

In the past, the creditor had the opportunity to question the debtor about their financial affairs, including pre-pack

sales, during the meeting of creditors in Chapter 11. However, if the solicitation of acceptance occurred before the case began, the creditor can no longer object to the plan on this basis because the trustee will not schedule a meeting of creditors after the petition. Comparison 1. Requirement under insolvency law In the United States, the law offered two methods for selling a business before formal insolvency.

The section 363 is similar to the pre-pack regulation in the U.K., but SSL 126 offers another approach for trustees to negotiate with various groups of creditors or leave certain miscellaneous creditors unaffected by the plan. The key aspect of this type of pre-pack is that the creditors' solicitation and voting take place before the filing. Initially, the role of the court was very similar in both countries until the Enterprise Act 2002 (U.K.).

The I-J insolvency regime introduced the out-of-order administration as an alternative to court involvement for insolvent companies. However, the Bankruptcy Court in the U.S is ultimately responsible for all stages of the rescue process. In the case of pre-pack, the I-J follows a negative approach wherein practitioners do not require court approval for the pre-pack plan if there is a pressing commercial need. Only if they fail to fulfill their fiduciary responsibilities towards creditors will the court intervene.

On the other hand, in the US, a more positive approach is taken where pre-packaged bankruptcies must receive court permission under both SASS and SSL 126, similar to traditional bankruptcy cases. This means that directors or supervisors of an insolvent company are involved during the reorganization process. On the contrary, in the I-J administration procedure, directors

must relinquish control and invite an external insolvency practitioner to participate. This practitioner can offer suggestions for the pre-pack administration and may be appointed as the administrator later.

Both countries have provisions to regulate that directors should consider the interests of creditors when a company is in financial difficulties. However, the conduct of administrators is regulated and monitored separately by an independent body called the Joint Insolvency Committee in the UK. Both countries have also provided several solutions to protect the interests of creditors, but it is likely that these creditor protections for pre-pack are weak in practice.

In the US, both the pre-packaged plan under SSL 126 and the traditional Chapter 11 bankruptcy require the same voting procedure. This involves providing significant protection options for creditors to choose from. However, companies generally prefer utilizing the pre-pack under SASS. Although the court still requires creditor consent, as stated in SSL 129 (a)(8) and evident in the Chrysler Case, it has been suggested that the rules regarding rarity may be disregarded in pre-pack situations and that solicitation may not be adequately established.

Another reason could be that the unimpaired creditors are meant to be unaffected by the bankruptcy, hence they are not included in the voting requirement. However, there are instances where the unimpaired treatment may not actually be unimpaired, resulting in erosion of creditor interests. The pre-pack in UK has also been criticized for exploiting particular types of unsecured creditors. Due to limited information accessible to creditors, they have minimal opportunity to make a claim on the pre-pack plan unless they can provide evidence demonstrating prejudice to their interests. 5.

In the United States, the

court includes a valuation process when deciding whether to approve a plan. In the United Kingdom, if a practitioner conducts a sale valuation that is not at the best price, there is a risk of challenge from a subsequently appointed liquidator, potentially leading to personal liability. However, there are no specific rules regarding valuation in either country, making it difficult to assess reasonableness in practice. Consequently, courts may not solely rely on valuation alone. Additionally, the role of government is significant during large pre-pack bankruptcies in both countries.

The Treasury, as part of the government, played a significant role in supporting the sale or acting as the main creditor for insolvent companies. This could be attributed to the domestic policy aimed at preserving major companies in key industries. However, this involvement had a direct impact on the court's consent requirement by influencing the decisions made by other major creditors. Although there is no explicit evidence showcasing the government's impact on pre-packaged deals in the UK, it is possible that their actions had an unintended influence on these transactions.

The primary worry regarding the pre-pack is centered around the disclosure of information, which could result in unfairness and bias towards certain unsecured creditors. One suggestion is for the practitioners or trustee to notify the creditors in advance and provide them with a brief period, perhaps three or four days, to review and contest the plan. Another option is for the administrator to implement stronger measures to ensure transparency and information disclosure, thereby safeguarding potential victims of pre-pack. Another crisis concerning pre-pack pertains to Pioneering.

The regulation should enforce stricter investigation on the background of third parties

and reject pre-pack transactions between new entities and existing directors. This measure can prevent bias towards creditors' interests. To protect the creditors, the law should require that those who suffer damage or exclusion due to pre-pack arrangements be compensated at the same level as if the insolvent companies had undergone traditional rescue proceedings or liquidation.

The essay does not address the legality of pre-pack. However, it can be acknowledged that pre-pack is legal under both US and UK regimes. The government's perspective on pre-pack could influence future regulations, as it may be seen as providing significant benefits for directors at the expense of certain creditors. Another consideration is the impact on taxation. Pre-pack may offer advantages in terms of deferred loss compared to other forms of reorganizations.

This article also omitted the impact of multinational insolvency on the pre-pack. In conclusion, while the pre-pack administration can assist insolvent companies in swiftly and efficiently reorganizing their capital through asset sales to maximize creditors' benefits, the misuse of pre-packs often stems from the lack of transparency and adequacy of fiduciary duty by administrators or trustees towards all creditors.

In the UK, the Administrator has authority over all aspects of the business, including pre-pack sales, without needing court permission. The SIP'S (Statements of Insolvency Practice) are crucial in enhancing transparency and accountability during the process. There are several legal options available to protect creditor rights. Therefore, it can be concluded that the pre-pack system in the UK is not as strictly regulated as other administration procedures. Regarding U.

S, There are two processes of pre-pack, including SASS and SSL 126. The trend is that pre-pack is more likely

to go through SASS and is widely supported by the court. This may have a negative impact on the entire Chapter 11, as the SSL 129 requirement for confirmation of the plan may be overridden. The court plays a crucial role in the entire process as it can determine whether the pre-pack plan can be approved or not. The Bankruptcy Code and Rules provide creditors with various rights and protections under pre-pack through SSL 126.

Regulators should consider finding a balance between protecting the interests of all creditors and promoting insolvent companies as going concerns. Ultimately, compliance with disclosure requirements and ensuring creditors' protection will significantly enhance public confidence in pre-pack arrangements.