Vol 13 (2016) - Issue 2

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The End of Pre-packs? An Analysis of the Legal Landscape in which Pre-packs Operate and the Failures of Graham’s Proposals – Part One

1 Introduction
In the aftermath of the financial crisis, pre-packaged administrations ('pre-packs') have once again come into the spotlight as a result of the increase in numbers of distressed companies trying to rescue their businesses. This two-part article is intended to challenge Teresa Graham’s suggested reforms, clarify the pre-pack practice and explain why their stigma is unjustified. This first part will provide a background and assess the first major piece of consultation in the area of pre-packs delivered by Sandra Frisby.
When implementing a restructuring a variety of procedures can be adopted. A pre-packaged administration is a course of action which many companies choose in order to transfer the business to its new owners after it has been restructured. A pre-pack has been described as an 'arrangement under which a sale of all or part of a company’s business and/or assets is arranged before the formal appointment of an insolvency practitioner as administrator'. A pre-pack is a speedy process, nevertheless, should it be performed under the right conditions they have been argued to bring about the best possible outcome for all concerned stakeholders in the company. However, fairly often the pre-pack sale will be to connected parties from the old corporation which has consequently lead to pre-packs being accused of enabling the rise of phoenix companies. In addition to this there is a lack of transparency in the sale process along with an unregulated usage of pre-packaged administrations. This has created an atmosphere of mistrust amongst unsecured creditors towards pre-packaged administrations, as 'their rights may be wiped away against their will and without any consultation'. Subsequently these factors led to renewed pleas by concerned stakeholders for more intervention by regulators. Thus in June 2014 the latest wave of reforms proposed by Teresa Graham were presented. These proposals have been met with both positivity and unease by concerned market participants. On the one hand it has been argued that they strike the right balance between transparency and fairness and hence ensures third parties that a fair market value is obtained for the business. On the other hand it has been said that they intervene too much in an area where speed is of the essence and should therefore not be subjected to anything that contravenes this.