Vol 7 (2010) - Issue 5

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The Benefits of UK-style Pre-packs and Comparisons with other Jurisdictions

Summary
This article analyses the availability of pre-packaged business sales in a financially stressed scenario ('prepacks') in certain European jurisdictions and in the USA. The article will show that companies may increasingly engage in 'forum shopping' attempting to shift their centre of main interests to a jurisdiction which allows them to effect a pre-pack solution. Discussion of pre-packs has reached the press in the UK and this technique, which is perceived to be very senior lender friendly, is a source of controversy. It is striking however how often pre-packs are used in the UK and it is worth considering therefore whether other jurisdictions in the US and Europe accommodate this technique.

Benefits of a 'pre-pack'
The term 'pre-pack' is used in UK administration and refers to the sale of a distressed business where all of the sale arrangements are negotiated and agreed prior to the onset of formal insolvency procedures and effected immediately on or shortly after the appointment of an administrator. A key point of the technique is that in deciding whether to effect the sale the administrator does not necessarily have to involve the court nor consult with the junior creditors who will often be left with little or no value following the sale. Despite this, it is submitted that in certain situations pre-packs can achieve the best outcome for the “in the money” creditors. A smooth transfer of a business can occur which protects employees and shields the company from negative press and the inevitable negative consequences which would otherwise result in a trading administration. In addition, many trading administrations require additional monies to fund the operation of the business; for example the administrators of Lehman Brothers International (Europe) sought emergency funding from a fund, Carval, in order to pay staff wages at the beginning of the administration. Often, however, such funding is not available in the current market leaving the administrator with no option but to try to effect a quick sale.
Pre-packs are becoming well established in the UK. The pre-packaged insolvency option is not available in a number of jurisdictions. The UK is not, however, the only jurisdiction with procedures in place which facilitate pre-packs, but as we shall see most other jurisdictions often require the involvement of a court, and/or the sanction of other creditor groups.

Pre-pack v Scheme of Arrangement
It is worth explaining the key differences between a pre-pack and a scheme of arrangement under English law to prevent confusion of these terms during comparison of various jurisdictions. The differences occur in the involvement of the courts and creditors.