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The Rise of Pre-Packs as a Restructuring Tool: Theory, Evidence and Policy

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Abstract

The use of pre-packs as a restructuring tool has been traditionally popular in the United Kingdom and the United States. In recent years, however, several jurisdictions around the world, including Singapore, India, Spain, the Netherlands and the Philippines have promoted the use of pre-packs. By shortening the length of insolvency proceedings, pre-packs have the ability to reduce the costs of financial distress—especially those associated with the loss of reputation, employees, suppliers, consumers and goodwill. Thus, pre-packs can help maximise the value of the firm for the benefit of debtors, creditors, and society as a whole. However, the conflict of interests, lack of transparency and various forms of opportunistic behaviour that could potentially arise from the use of pre-packs have raised some concerns about the desirability of this restructuring tool. This article analyses the concept and types of pre-packs generally found around the world, as well as their similarities and international divergences. It will also review the empirical evidence on pre-packs with the purpose of getting a better understanding of the actual features, risks and outcomes of this restructuring tool. It will conclude by discussing whether countries should promote the use of pre-packs and, if so, how this mechanism can be adopted to serve as an efficient restructuring tool while providing effective protection to creditors.

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Notes

  1. Frisby (2007); Armour (2012); Walton et al. (2014).

  2. For a comprehensive database reporting the number of pre-packaged reorganisations filed from 1980 to 2021, see UCLA-LoPucki Bankruptcy Research Database (2022).

  3. For an analysis of the first pre-pack completed in Singapore, see Lim (2021). For other successful cases of pre-packs, see note 57.

  4. The Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), Chapter III-A. In India, however, not all MSMEs have access to pre-packs due to the fact that this restructuring tool is only available to micro, small and medium-sized companies. Therefore, it excludes sole proprietorships and other businesses not adopting a corporate form.

  5. See Springorum and van Pelt (2019).

  6. In Spain, the insolvency reform implemented in 2022 regulates pre-packs. However, pre-packs were already allowed by various Spanish courts. See Thery et al. (2021).

  7. See Garrido (2012), p 49.

  8. For the concept of pre-negotiated reorganisations, see Dunne et al. (2019). See also Garrido (2012).

  9. Ibid.

  10. Ibid.

  11. Prepackage filings were consistently within a range of 50–100 days from filing to emergence, averaging nearly 80 days to emerge. See Yozzo and Star (2018). In some cases, however, pre-packs in the United States have even been approved in 24 hours. See, for example, Holohan (2021).

  12. See Yozzo and Star (2018).

  13. For an analysis of the pre-negotiated rehabilitation adopted in the Philippines, see Paz (2020), pp 570–571. For the origins of the pre-packaged scheme of arrangement in Singapore, see Ministry of Law (2016), pp 13–14. See also Lim (2021).

  14. In South Korea, see Debtor Rehabilitation and Bankruptcy Act, Articles 222–224. See also Rim (2020), pp 687–688. In Japan, a summary rehabilitation procedure is also available. See Mori and Yanagida (2007). In Spain, a fast-track reorganisation procedure consisting of allowing debtors to submit a reorganisation plan supported by creditors (propuesta anticipada de convenio) was allowed under the Insolvency Act 2003 (in force since September 2004) that was then converted into an omnibus legislation in 2020. However, the insolvency reform adopted in 2022 abolished this fast-track reorganisation procedure. In exchange, the reform includes the adoption of a new restructuring plan and the regulation of a pre-pack that resembles the type of pre-packaged sale of businesses traditionally existing in the United Kingdom.

  15. These agreements are usually subject to various procedural requirements and are not binding on certain creditors. For the Argentinian debt restructuring agreement (acuerdo extrajudicial de pagos), see Beller (2010). In Brazil, see Costa (2018). For an overview of the regime for out-of-court debt restructuring agreements traditionally existing in Italy (accordi per la ristrutturazione di debiti), see http://restructuring.bakermckenzie.com/wp-content/uploads/sites/23/2017/01/Global-Restructuring-Insolvency-Guide-12-2016New-Logo-Italy.pdf (accessed 5 October 2022). For an analysis of this restructuring agreement under the new Italian Insolvency Code, see https://www.ashurst.com/en/news-and-insights/legal-updates/the-new-italian-insolvency-code/ (accessed 9 October 2022). In Uruguay, see Insolvency Act 2008, Article 214. Spain used to have similar out-of-court refinancing agreements sanctioned by courts (acuerdos de refinanciación). See Tirado (2017). However, the Spanish insolvency reform adopted in 2022 replaces those agreements with a new restructuring plan.

  16. Adopting a definition of ‘pre-packs’ that includes the judicial confirmation of a settlement agreed out of court that is binding on dissenting creditors even if it does not lead to the commencement of a formal reorganisation procedure, see Bergthaler et al. (2015), p 11. Including summary proceedings under the concept of ‘pre-packs’, see Bauer et al. (2021), pp 18–20.

  17. See Walton et al. (2014), pp 25–26.

  18. See Insolvency Practitioners Association, https://insolvency-practitioners.org.uk/uploads/documents/f30389ce35ed923c06b2879fecdb616a.pdf (accessed 5 October 2022).

  19. See notes 4, 9 and 13.

  20. In the United Kingdom, see Phillips and Kaczor (2010). In the Netherlands, see Government information for entrepreneurs https://business.gov.nl/ending-your-business/financial-problems-and-bankruptcy/pre-pack-bankruptcy/ (accessed 9 October 2022). In Spain, see Insolvency Act 2020, Article 224 bis.

  21. See Government information for entrepreneurs https://business.gov.nl/ending-your-business/financial-problems-and-bankruptcy/pre-pack-bankruptcy/ (accessed 9 October 2022).

  22. See Insolvency Act 2020, Article 224 bis.

  23. Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), Chapter III-A.

  24. In the Netherlands, see Springorum and van Pelt (2019). In the United States, see Dunne et al. (2019). In Spain, UK-style pre-packs were also allowed by certain courts prior to the formal adoption of pre-packs in the insolvency reform implemented in 2022. See Thery et al. (2021).

  25. Such guidelines have been issued, for example, by the United States Bankruptcy Court for the Southern District of New York. See Procedural Guidelines for Prepackaged Chapter 11 Cases in the United States Bankruptcy Court for the Southern District of New York (2013). Prior to the existence of the formal regulatory frameworks for pre-packs implemented in 2022, various Spanish courts also enacted certain guidelines to deal with pre-packs.

  26. The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021.

  27. See Insolvency Practitioners Association, https://insolvency-practitioners.org.uk/uploads/documents/f30389ce35ed923c06b2879fecdb616a.pdf (accessed 5 October 2022).

  28. In Singapore, see Insolvency, Restructuring and Dissolution Act 2018, section 71. In India, see Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), Chapter III-A. In Spain, see Insolvency Act 2020, Article 224 bis.

  29. See Tashjian et al. (1996).

  30. The empirical literature has shown that the direct costs of insolvency proceedings represent 3–4% of the pre-bankruptcy market value of total assets. See Warner (1977), as well as Branch (2002), pp 42–43.

  31. Andrade and Kaplan (1998).

  32. For an analysis of the different indirect costs generated by a situation of financial distress, see Berk and DeMarzo (2011), pp 514–516.

  33. Showing the lower direct costs of pre-packs, see Tashjian et al. (1996), pp 143–144. See also Branch (2002).

  34. Frisby (2007), p 34.

  35. Ibid.

  36. Just as a phoenix is able to burst into flames and rise again from its ashes, the term ‘phoenix’ is used in the context of pre-packs where the sale is made to a Newco purchaser controlled by the same directors and/or owners of the existing insolvent trading company, see Sidley (2021). See also Australian Securities & Investments Commission (2021).

  37. Testing this hypothesis and finding no evidence of this problem, however, see Polo (2012).

  38. Walton (2011), pp 10–11.

  39. Ibid.

  40. Walton (2006).

  41. Ibid., citing Finch (2006), p 574.

  42. See Ve Vegas Investors IV LLC v Shinners [2018] EWHC 186 (Ch).

  43. Gurrea-Martinez (2021a).

  44. Kastrinou and Vullings (2018), p 326; Finch (2009), p 462; Davies (2006), p 16.

  45. Finch (2009), p 458, citing Plevin et al. (2003), pp 888-889.

  46. McCormack (2008), p 105. See also In re City of Colorado Springs 177 B.R. 684, 691 (Bankr. D. Colo. 1995).

  47. McCormack (2008).

  48. Finch (2009), p 458, citing Plevin et al. (2003), p 889.

  49. The UK court has signalled that an ex post challenge by a ‘sufficiently aggrieved creditor’ is possible, see Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch) at [8]. However, unsecured creditors are ‘not known for exercising the statutory rights at their disposal’, see Walters (2015), p 569.

  50. See the Insolvency and Bankruptcy Code, 2016 (No. 31 of 2016), section 54A(1).

  51. Walton et al. (2014), pp 12–13. See also Frisby (2007), pp 24 and 26.

  52. Frisby (2007), pp 24 and 26. See also Katz and Mumford (2008).

  53. Walton et al. (2014), p 11.

  54. Frisby (2007), p 24.

  55. Ibid., p 26.

  56. Walton et al. (2014), p 15.

  57. The turnaround of PT MNC Investama included the restructuring of US$231 million (S$311 million) of secured notes. See Vijayan (2020). In July 2021, Modernland Realty applied for a court sanction of a pre-packaged scheme to restructure two sets of notes worth more than USD400 million. See Chua et al. (2021).

  58. See note 2.

  59. Foley et al. (2021).

  60. Tong (2021).

  61. Business Wire (2020).

  62. Petition (2019).

  63. Ibid.

  64. Some authors, however, define reorganisations as ‘hypothetical’ sales. See Baird (1986).

  65. Frisby (2007), pp 40-47.

  66. Walton et al. (2014), pp 27–28.

  67. See, for example, Holohan (2021).

  68. See Bauer et al. (2021), p 20, footnote 12. These authors reported that while the average ordinary reorganisation procedure in the US during the period 2011-2018 lasted 504 days, pre-packaged reorganisations for the same period lasted only 77 days on average, and pre-arranged bankruptcy cases lasted 219 days on average. Between the period October 1986 and June 1993, however, some studies showed that the average pre-packaged reorganisation in the US lasted 21.6 months. Based on this evidence, the authors argued that the speed of pre-packs can often be exaggerated. See LoPucki and Doherty (2002).

  69. Frisby (2007), p 50.

  70. Walton et al. (2014), p 23.

  71. Ibid, p 20.

  72. Ibid.

  73. Ibid.

  74. Ibid., p 45.

  75. Ibid., p 21.

  76. Frisby (2007), p 60.

  77. Ibid.

  78. Returns of over 50% are recorded in 74% of the pre-pack sample, as compared to 66% of the business sale sample, see ibid., p 61.

  79. Ibid., p 64.

  80. The average creditor dividend is 7.22% for pre-packs, while the average creditor dividend is 13.06% for business sales in ordinary administration, though it should be noted that the latter data ‘appears to be skewed by significantly larger distributions’, and the median value for returns is lower in business sales in ordinary administration as compared to a pre-pack; see Walton et al. (2014), pp 32 and 65.

  81. Frisby (2007), pp 65–66.

  82. Ibid.; see also Walton et al. (2014), pp 32 and 65, both highlighting that more than 50% of both pre-pack and business sales in ordinary administration cases lead to no dividends distributed to unsecured creditors.

  83. Ibid., pp 33 and 66.

  84. Polo (2012).

  85. Walton et al. (2014), p 80. However, the evidence does not seem conclusive. See, for instance, Frisby (2007), pp 75–78.

  86. Walton et al. (2014), pp 50-52 and 69. See also Frisby (2007), p 79, stating that for business sales in administrations, the survival rate for connected sales was 58%, while the survival rate for unconnected sales was 71.9%. For pre-packs, the survival rate for connected sales was 51.4%, while the survival rate for unconnected sales was 71.5%.

  87. Walton et al. (2014), p 38.

  88. Ibid., pp 39 and 78.

  89. LoPucki and Doherty (2002), p 1972.

  90. Ibid.

  91. Frisby (2007), p 71.

  92. Ibid., p 70.

  93. See Springorum and van Pelt (2019), referencing van den Bosch (2018).

  94. For an analysis of the enhanced scheme of arrangement existing in Singapore and the new restructuring plan adopted in the United Kingdom, see Gurrea-Martinez (2021c). For the restructuring procedure adopted by the EU Directive on Preventive Restructuring Frameworks, see McCormack (2021).

  95. In Colombia and Singapore, the simplified insolvency framework for MSMEs has been adopted temporarily, at least so far. For an analysis of various jurisdictions adopting simplified insolvency frameworks for MSMEs, see Gurrea-Martinez (2021a).

  96. In many countries, such as the United Kingdom, the use of informal norms favouring workouts, known as ‘the London Approach’, mainly targets large companies with concentrated debt structures. See Armour and Deakin (2001). However, pre-packs are often used by MSMEs. Therefore, pre-packs are expected to be more needed and utilised if companies do not have access to informal norms favouring workouts. That would help explain why pre-packs in the United Kingdom are frequently used by MSMEs.

  97. Armour and Deakin (2001), pp 40-46. See also Armour et al. (2002), p 1759.

  98. Armour et al. (2002), p 1707. See also Gurrea-Martinez (2021a).

  99. Gurrea-Martinez and Ooi (2020); Díez et al. (2021). See also Garrido (2012), p 23.

  100. For data on the efficiency of these countries’ insolvency regimes, see The World Bank (2019).

  101. Gurrea-Martinez (2020).

  102. See part 4.1 above and note 51.

  103. Gurrea-Martinez (2021a).

  104. Business Today India (2021).

  105. Gurrea-Martinez (2020).

  106. Gurrea-Martinez (2021b).

  107. World Bank Group (2021), p 7.

  108. Gurrea-Martinez (2021b).

  109. Ibid.

  110. See Section 3.2.

  111. See Armour et al. (2015). See also Gurrea-Martinez (2021b).

  112. In the absence of an actual vote, creditors may support the pre-pack by way of signed ballot forms. This is the system traditionally existing in the United States Bankruptcy Court for the Southern District of New York and it has also been adopted in Singapore. See Lim (2021).

  113. Gurrea-Martinez (2020).

  114. See Insolvency Practitioners Association, https://insolvency-practitioners.org.uk/uploads/documents/f30389ce35ed923c06b2879fecdb616a.pdf (accessed 5 October 2022).

  115. Bo (2012), pp 89–94. For a variety of solutions seeking to improve the regulatory framework of pre-packs in the United Kingdom, see Umfreville (2018).

  116. Armour (2012), p 27.

  117. Ibid.

  118. Ibid.

  119. Advocating for this solution, see ibid. Unfortunately, this solution would only work in companies with independent directors. Therefore, as many companies (especially MSMEs) do not have independent directors, other solutions should be explored.

  120. Armour (2012), p 27.

  121. Frisby (2007), p 31.

  122. Davies (2006).

  123. Finch (2012), p 319.

  124. Ibid., citing Turnaround Management Association President Bryan Green’s letter to the Financial Times of 5 April 2011, where he proposes a ‘14-day period following the pre-pack, during which all stakeholders can make any objections they might have heard’, https://www.ft.com/content/4af8cbfe-5f0b-11e0-a2d7-00144feab49a (accessed 3 September 2021).

  125. Flynn (2006)

  126. Ibid., and Finch (2012).

  127. The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, Regulation 3.

  128. For an analysis of the nature, conditions and content of the report, see ibid., Regulation 5–8.

  129. Ibid., Regulation 3, at Chapter 3.

  130. Ibid., Regulation 7(h).

  131. Ralph (2020).

  132. West and James (2020) and Hopewell (2021).

  133. Ralph (2020); Carney (2021); Ampaw and Green (2021).

  134. See Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch) at [8].

  135. Gurrea-Martinez (2020).

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Acknowledgements

For valuable comments and feedback I would like to thank an anonymous reviewer and the participants of a seminar on pre-packs organised by the Asian Business Law Institute where I had the opportunity to present a preliminary version of this article. For excellent research assistance, I would like to thank Khoo Xin Hui, Sean Lee, Cindy Chua and Rachel Toh. All errors are mine.

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    Aurelio Gurrea-Martinez

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Gurrea-Martinez, A. The Rise of Pre-Packs as a Restructuring Tool: Theory, Evidence and Policy. Eur Bus Org Law Rev 24, 93–116 (2023). https://doi.org/10.1007/s40804-022-00261-3

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