The Rise of the ‘Pre-Pack’: Corporate Restructuring in the UK and Proposals for Reform

Abstract

The practice of corporate restructuring in the UK has recently been transformed. The early twenty-first century has seen a tendency for corporate debt structures to be more fragmented, making informal renegotiation much more difficult to coordinate in times of financial distress. This has increased the incidence of formal insolvency proceedings. However, trading partners tend to desert a business once it has entered formal proceedings, meaning it suffers a rapid loss of goodwill. Consequently, more value can often be realised for the business if formal proceedings are kept as short as possible. This has lead practitioners increasingly to implement ‘pre-packaged’ administration proceedings, whereby a sale of the debtor firm’s assets is agreed in principle prior to the appointment of the administrator. Whilst pre-packaged sales do minimise damage to the debtor’s goodwill, they also raise concerns about potential abuses, especially where the sale is to a connected party, such as the existing owner-managers. This paper reviews these developments and considers the legal protection available to unsecured creditors under the current law, as well as recent reform proposals considered by the UK's Insolvency Service. It is argued that each of these proposals has the potential to generate new costs of their own, and that effective protection could be given to unsecured creditors through a more straightforward disclosure mechanism drawn from the UK Takeover Code’s MBO provisions.

Keywords: insolvency law, corporate restructuring, administration, pre-packs

JEL Classification: G33, G34, K22