This is an Insight article, written by a selected partner as part of GRR's co-published content. Read more on Insight
The term ‘pre-pack’ continues to be something of a hot topic in the world of restructuring and insolvency. It can be used to describe a number of different arrangements and processes across a variety of jurisdictions. Some of these arrangements are broadly similar, others quite different in nature. This guide seeks to give an insight into two of the more established forms of pre-packs: under Chapter 11 bankruptcy in the United States, and as part of an administration in the United Kingdom. It also seeks to show that the core elements of a pre-pack can be found in a variety of jurisdictions, even though no generally accepted pre-pack option might exist.
This guide explores, through our collection of jurisdictional contributions, the varying forms of pre-packs in different countries. The general theme of a pre-pack is that, despite its form varying between jurisdictions, there are common underlying characteristics attributable.
What is a ‘pre-pack’?
In essence, the term ‘pre-pack’ refers to a twofold process in which, first, a restructuring is negotiated and agreed with requisite stakeholders, and second, the agreement is implemented through a formal insolvency process.
The first characteristic we would highlight, which is visible in almost all jurisdictions represented in this guide, is that a pre-pack involves a private (and discrete) negotiation of a restructuring proposal and an agreement on terms prior to implementation through a formal insolvency. The negotiation and agreement may not involve all stakeholders; expediency often dictates that only those directly implicated or whose consent is needed to implement the restructuring have a role to play in formulating and agreeing its terms. However, the pre-pack offers a chance for private market participants to agree a deal outside of the fanfare and potentially negative connotations surrounding a typical formal insolvency process.
The second characteristic, very much linked to the first, is the focus on limiting the amount of time the debtor entity spends in a formal insolvency process. The reason for the private negotiations ahead of implementation is to address most of the work of the restructuring first, such that the deal is effectively done prior to a filing and can be implemented without undue delay once a filing is made. The logic behind this characteristic, which is perhaps a statement of the obvious, is that, in many jurisdictions, bankruptcy and insolvency carry such a stigma that any announcement of a filing can exacerbate financial difficulties and make corporate rescue a less attainable goal. Similarly, pre-packs retain value in a company by maintaining market confidence.
An additional perceived advantage of the brevity of any insolvency process is reduced cost. While pre-packs may take many months to negotiate, there are generally only a limited number of parties involved in the negotiations than there would otherwise be in a formal insolvency process. For example, in the United States, the trustee will often elect not to appoint a committee of unsecured creditors, which has the benefit of reducing a company’s administrative costs.
The third characteristic, implementation through a formal insolvency process, is common to most jurisdictions, although the form the pre-pack restructuring will take depends on the tools available under the relevant legal framework. In the United States, the restructuring often proceeds by way of a plan of reorganisation where the reorganised debtor emerges from bankruptcy with a restructured balance sheet. In jurisdictions that lack procedures to impose compromises on dissenting minority stakeholders, pre-pack restructurings are implemented through sale transactions conducted by insolvency officers. In almost all circumstances, the ‘pre-pack’ methodology itself is not specifically legislated for; it tends to be formulated through market practice utilising and interpreting existing restructuring frameworks. In some cases, as the chapters of this guide demonstrate, existing processes that were not necessarily designed for use in ‘prepackaged’ form are moulded and shaped to allow for the core objectives of a pre-pack to be achieved.
Pre-packs as a tool for corporate rescue
Given the characteristics we describe above, it is perhaps no wonder that the aim of pre-packs is corporate rescue. Although varying in form and substance, in essence pre-packs are all about facilitating the continuity of the core business as a going concern. This reflects the broader shift in the restructuring mindset in many jurisdictions towards creating a ‘rescue culture’. We can see this, for example, in the legislative developments in the United Kingdom. The Enterprise Act 2002, which amended the administration procedure and enabled increased use of pre-pack administrations, included in its explanatory notes a statement that ‘rescuing the company as a going concern’ is intended to mean that ‘the company and as much of its business as possible’ is rescued.
While this guide goes into detail on pre-packs in the United States and the United Kingdom, the art of the pre-pack is not limited to these countries. The United States and the United Kingdom have, arguably, the most established pre-pack processes, but other jurisdictions have also developed their own processes and procedures that share many of these characteristics. This guide showcases a collection of contributions from lead practitioners around the world who detail the means by which a pre-pack can be effected in their jurisdiction. What we learn from these contributions is that, in a number of jurisdictions, the pre-pack continues to develop as an innovative corporate rescue tool.
Balancing rescue and fairness
The other theme that emerges from the chapters in this guide, as well as legislative developments in a number of jurisdictions, is a note of caution around the potential for pre-packs to be used in an abusive manner. There is increasing emphasis in a number of jurisdictions on ensuring that the focus on corporate rescue does not come at the expense of well-established principles of impartiality, transparency and fair dealing.
The process of negotiating and agreeing a restructuring proposal in advance often necessitates the participation of the prospective office holder. This clearly lends the transaction a degree of certainty in that stakeholders can be comforted by the fact that the negotiated deal will be implemented upon a filing. A further advantage of this early participation is that the office holder, who is often bound by statutory obligations and professional guidelines, can exert influence on negotiations to ensure these will be respected in the ultimate transaction. However, this prior involvement could raise concerns around a lack of impartiality of the prospective office holder.
The private nature of the negotiation surrounding a pre-pack makes transparency a clear issue. In the United Kingdom, for example, while certain creditors (often those with secured debt) may have the opportunity to engage in negotiations prior to implementation of a pre-pack sale, out-of-the-money creditors often have little or no prior knowledge of a pre-pack being considered, and therefore only limited opportunity to protect their interests. The focus on privacy and limiting the negative impact of any process on the business often means that marketing processes can be limited and transfers of assets are often to connected parties. This has created concerns relating to the transparency and fairness of pre-pack sales. Accountability is also a key concern. Oversight through the relevant court is limited, with the court typically being asked to simply bless an already agreed upon deal.
As detailed further in Chapter 1, in response to these concerns the United Kingdom introduced new regulations in April 2021. Although it is too early to evaluate the impact of the regulations, they clearly represent a desire to tip the scales towards fairness and increase market confidence in pre-packs.
A fork in the road for the United Kingdom?
The United Kingdom’s restructuring landscape has also been significantly reshaped by the Corporate Insolvency and Governance Act 2020, which introduced a new restructuring procedure, the restructuring plan. The restructuring plan is a flexible and powerful tool that may arguably address some of the perceived flaws of the previous mechanisms, which drove the popularity of pre-packs. How restructuring plans, schemes of arrangement and pre-packs will interact in the future remains uncertain. In the post-pandemic world, practitioners are likely to welcome the addition of new tools that can be used to find creative ways to achieve corporate rescue. As restructuring plans continue to gain momentum, whether pre-packs can hold their own against the newcomers, and go some way to address concerns about fairness and transparency, is still unclear. Either way, we are at an important juncture in the evolution of pre-packs in the United Kingdom.
As demonstrated by this volume, pre-packs exist in some form in a number of jurisdictions, and they are a popular implementation tool. There remains a challenge to balance the objective of corporate rescue and of preserving as much of the business, and as many jobs, as possible, with the need for fairness and transparency to the broader stakeholder group. The key question is whether the pre-pack can continue to evolve as an art form around the world to adequately address these concerns.