Pre-packaged insolvency

Pre-packaged insolvency (a "pre-pack") is a kind of bankruptcy procedure, where a restructure plan is agreed in advance of a company declaring its insolvency. In the United States pre-packs are often used in a Chapter 11 filing. In the United Kingdom, pre-packs have become popular since the Enterprise Act 2002, which has made administration the dominant insolvency procedure. Such arrangements are also available in Canada under the Companies' Creditors Arrangements Act.

The term "pre-pack sale" has been defined by the Association of Business Recovery Professionals 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". The difference between a pre-pack sale and a normal sale is that in a normal sale the administrator markets the business and negotiates the terms of the sale after his appointment.

The reasons an administrator sells on a pre-pack basis, rather than after post-appointment marketing, vary from case to case, but they often involve the following considerations. A pre-pack sale avoids the costs of trading (which means creditors receive more back), and indeed, the company and the administrator may not have the funds to trade. It also avoids the administrator taking on the risks associated with trading. The value of the business may deteriorate during administration trading.

There may be other factors to prevent trading, such as regulatory problems.

The courts have held that an administrator can sell the company's assets immediately upon his appointment, without court approval or the approval of the creditors, and he can do so even if the majority creditor objects. Courts have even approved transactions that, as a "necessary evil", have made payments to the former management while leaving little or nothing to unsecured creditors.

In January 2009, the Association of Business Recovery Professionals issued the Statement of Insolvency Practice 16 to require insolvency practitioners acting as administrators to disclose a number matters to all creditors as soon as possible after the completion of the sale. That s was done in an attempt to provide greater transparency to creditors.

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