Pre-packs enable failing businesses to be quickly sold to new owners. They do not need the approval of unsecured creditors, leading to accusations that the deals can enable an existing management to run a business into the ground, then stage a cut-price buyout while shedding debts.
Under draft proposals published this week, administrators will have to give all creditors three days’ notice. Insolvency practitioners say this could destroy the value of the rapid ownership change in maintaining business stability.
“It comes from a rather cynical, while you can understand the thinking behind the view, will make the advantages-speed, continuity of business and employment – that much harder to achieve,” said Mike Jervis, a PwC partner and one of the lead administrators of Lehman Brothers’ European operations.
Insolvency Service officials met stakeholders on Tuesday, but the meeting covered technical details rather than general policy.
Some people at the meeting said civil servants appeared caught off-guard by the strength of industry opposition.
A spokesperson for the service said officials had found the meeting useful and were considering responses from a range of stakeholders, including insolvency practitioners.
But insolvency experts say the proposed three-business-day notice period will in fact work more like a full week after administrators allow for postage time and weekends – giving suppliers and their partners precisely the uncertainty the deals were designed to avoid.
“This idea is just not based on the real world,” said Adam Plainer, head of the London restructuring team at Weil Gotshal.
“The purpose of pre-packs is to ensure business continuity, but even if suppliers are happy to work with the new company, there’s a good chance their credit insurers may not let them, and you’ll end up with the same confusion as a general administration.”
Banks became large users of pre-packs during the financial crisis to wrest control of ailing enterprises in which they were the biggest creditor.
The best-known deal was EMI, the music group, where Citigroup took charge in February.
The company’s administrators said the deal had to be quick to preserve value and avoid a drawn out process that would have tempted the company’s assets – its signed artists – to seek security elsewhrere.
“[The Insolvency Service] must be aware of the law of unintended consequences with this. Pre-packs in the right circumstances are a hugely valuable tool,” said Peter Cranston, partner at Eversheds and immediate past president of the Insolvency Lawyers’ Association.
“There is great concern in the industry that we’re sleepwalking into something which aims to address perceived evils at the lower end of the market, but which will ultimately affect the whole market.