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Comparative Insolvency Law

The Pre-pack Approach in Corporate Rescue

Bo Xie

Comparative Insolvency Law argues that the most important development in contemporary insolvency law and practice is the shift towards a rescue culture rather than full creditor satisfaction. This book is the first to specifically examine the rise of the pre-pack approach, which permits debtor companies to formulate a clear pre-arranged exit before entering into formal insolvency proceedings. 
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Bo Xie

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Bo Xie

Chapter 1 deals with the concept of and approaches to ‘corporate rescue’ and examines the theoretical debate on the goals of insolvency law and corporate rescue, and how those various and sometimes competing goals could be effectively served. It further considers the advantages of the pre-pack approach in corporate rescue and questions whether this pragmatic approach to rescue is capable of accommodating different goals in corporate rescue, in the absence of an agreed working standard against which to measure these goals.
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Bo Xie

Chapter 2 offers a clear contextual account of the rise of pre-pack administrations in the UK and a critical appraisal of the key advantages of pre-packs in handling financially distressed businesses as compared to the UK’s formal rescue proceedings. In line with the evolution of the rescue culture in English insolvency law is the increasing desire for early intervention from major lenders at the first sign of financial risk. This arguably encourages insolvency strategies to be crafted and pre-packed before the initiation of a statutory procedure. The pre-pack approach to rescue enjoys some compelling merits in preserving the value of ailing businesses. It allows necessary preparatory work to be carried out at an early stage and without pressure from the public, and ensures a timely disposal of the business in order to salvage worthwhile sections of the company that might otherwise have been jeopardised by the uncertainty and costs of lengthy formal proceedings. On the other hand, pre-packs bring new challenges, particularly to the traditional role of the administrator and the balance and control of insolvency decision-making.
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Bo Xie

Chapter 3 focuses on pre-pack sales to connected parties, questioning their vulnerability to abuse by insiders at the expense of general junior creditors. The key concern is that, when the business is sold to a connected party, the pre-pack strategy creates the risk that, while the interests of the insiders are fully aligned through the process, the interests of general unsecured creditors who are under-represented in the decision-making may be less well served. This chapter also examines the robustness of the UK’s requisite legal framework in responding to those concerns, in particular, the potential grounds to establish liability or provide a remedy under applicable statutory and common law duties to challenge those who have been assisting in the implementation of pre-pack sales, namely, company directors and the administrator, if they have acted in a dishonest manner. It argues that the current UK insolvency framework does not provide adequate monitoring mechanisms or effective remedial routes to respond to sensitive issues arising in the context of pre-packs, due to a mismatch between those who arrange the pre-packaged deals and those who execute them.
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Bo Xie

Chapter 5 examines the pre-packaged Chapter 11 proceedings in the USA as a fast track alternative to the traditional Chapter 11 reorganisation and considers the implications of pre-petition solicitation for the protection of the interests of claimholders who are constituted under a conventional Chapter 11 framework. The chapter also explores the differences between the US pre-packaged Chapter 11 and the UK pre-packaged administrations. The US pre-packed Chapter 11 is more regulated, retaining most of the safeguard mechanisms built to protect the procedural fairness under a standard Chapter 11 reorganisation. In contrast, in the UK pre-pack context, the original device for procedural inclusiveness and decision-making democracy in a standard administration procedure, notably creditors’ voting on the pre-pack arrangements, is often readily circumvented. Also, comparied to the UK’s ‘light touch’ approach of the courts in scrutinising administrators’ commercial decisions in insolvency, the US’s heavy reliance on judiciary supervision appears to be an advantage in regulating the pre-formal stage of pre-packs.
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Bo Xie

Chapter 8 discusses the implications of the increased use of the UK pre-pack proceedings to effectuate a quick business sale in the context of cross-border insolvency forum shopping. This phenomenon highlights to some extent the limited capability of current corporate rescue proceedings in those continental European jurisdictions in minimising the hold-out problem in the rescue process and their inflexibility in coping with the commercial requirement of speedy action. Furthermore, this trend has to some extent motivated an increased harmony in substantive national insolvency law at the European level. Arguably, those new changes introduced by the amended EC regulation on insolvency (Regulation 2015/848 of 20 May 2015) will have a far-reaching impact in ensuring that interaction between national insolvency laws through COMI-shifting inspires a healthy level of competition (as opposed to a ‘race to the bottom’) among national insolvency law-makers within Europe.
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Bo Xie

Chapter 6 examines s 363(b) pre-plan sales under the US Chapter 11 procedure, which may be closer to the UK pre-pack sales in the sense that both processes aim at value realisation through expedited going-concern sales and with denial of creditor participation in the process. It questions how the US approach in ameliorating the concerns of abuse raised in the accelerated sale process in insolvency differs to that of the UK. In absence of a fully negotiated resolution between the debtor and the affected creditors, the bankruptcy courts are left to carry out a complex judgment of divergent projections or appraisals of a commercial arrangement, as a decision of the court approving a sale becomes the last sanitising measure before its completion. In this context, US case law has been evolving in an attempt to offer effective guidelines in distinguishing permissible s 363 sales from those that involve potential abuses.
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Bo Xie

Chapter 4 looks into the recent efforts to address concerns surrounding pre-packs in the UK and comments on the effectiveness of those initiatives in addressing these concerns, especially pre-pack sales to connected parties. The Draft Rules 2011 intended to include extra regulation on pre-pack sales to connected parties with the proposed measure of a three-day notice requirement to offer creditors a pre-view right where there is a high suspicion of undervalue in a pre-pack sale to a connected party. However, this was abandoned as being seen by professionals as too restrictive and that it would create a legal setting that would impede administrators from pursuing their statutory objectives expeditiously. Aside from possible legislative intervention, more efforts have been made focusing on enhancing the transparency of the accelerated sale process through comprehensive ex post information disclosure requirements and accountability by reforming the regulatory regime of the insolvency profession. Yet, the professional self-regulation approach underpinning those strengthened measures continues casting doubt on how professional regulations can ameliorate the concerns of abuse raised in the connected pre-pack sales and build a responsive and consistent regulatory and sanction system that will apply a rigorous approach in the evaluation of administrators’ actions and behaviour.
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Bo Xie

Chapter 7 focuses on pre-pack or equivalent mechanisms that have been implemented or are under consideration in selected European jurisdictions to facilitate successful corporate rescue, namely France (the Sauvegarde Financie_re Acce_le_re_e proceedings and the Sauvegarde Acce_le_re_e proceedings), the Netherlands (the appointment of a silent trustee) and Germany (the Protective Shield Proceedings). It looks at the approaches taken in the aforementioned jurisdictions for the integration of the pre-packing strategy in formal insolvency procedures to facilitate the formulation of the restructuring plan, and attempts to identify the strengths and weaknesses of each system in utilising the pre-pack and other similar approaches in corporate rescue while providing adequate safeguards to creditors. A common procedural safeguard in the continental pre-pack approache is to place a neutral and well-informed court-appointed party to serve as a proxy for creditors in the course of the strategy formulation process. This, arguably, allows a trade-off between the requirement for speedy action and creditor participation to be satisfied in a court-coordinated way and ensures that the requisite legal constraints are not being summarily discarded.