Vol 8 (2011) - Issue 2

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Pre-Pack Administration: Winners and Losers

Introduction

A pre-packaged administration occurs where the business of an insolvent company is prepared for sale prior to the appointment of an administrator. This 'pre-arranged [and] pre-negotiated' sale agreement is then immediately completed on, or shortly after, the appointment of the administrator.' The speed at which the pre-pack has been integrated in modern insolvency practice and its widespread use' has 'inspired more controversy than any other insolvency-related matter in recent years'. This is because pre-packs are not exposed to the competitive forces of the open market and are therefore seen to lack transparency and display a want of accountability to unsecured creditors. Prepacks are also seen as biased towards secured creditors and parties connected with the company since a prepack sale will generally be made to a connected party. The recent Insolvency Service consultation paper proposing stricter regulation of the pre-pack process raises questions as to its legitimacy and poses a threat to its continued and unrestricted use.

The purpose of this analysis is to decide whether the decision to pre-pack should be viewed as a legitimate insolvency procedure in the light of arguments for and against the process. The first section will explore the origins of the pre-pack and decide whether its use in practice is consistent with the framework in which it operates. The second and third sections will critically examine the arguments for and against pre-packs to decide whether the balance of interests tips in favour of one side or the other.

Pre-packs in context

Since the findings of the Cork Committee in 1982, the principal objective of corporate insolvency has been the preservation or rehabilitation of the commercial enterprise. In furtherance of this objective, the Cork Report made recommendations to encourage the continuation of the debtor’s business as a going concern and the preservation of employment by removing any barriers that might prevent this. Further, the Cork Report suggested that English law would benefit from a corporate insolvency procedure specifically aimed at corporate rescue as opposed to mere asset realisation. In response to these recommendations, company administration orders were introduced under Part II of the Insolvency Act 1986 ('the 1986 Act'). These orders were viewed as a means of exploiting the advantages of the 'receivership mechanism', but where no administrative receivership was possible in the circumstances.