One of the many discussion points in Australian insolvency circles concerns the use of pre-pack arrangements. A recent report prepared for the British parliament gives an up-to-date summary of the current UK law, including recent changes in 2015.
British Parliament briefing paper
This briefing paper discusses the Graham report on pre-packs, the recent changes brought by the Small Business Enterprise and Employment Act 2015 (Eng) and the amendments made to SIP 16 (the practice statement on pre-packs).
As far as Australian insolvency law goes, there is no specific pre-packs legal regime here (yet). Insolvency practitioners are officers of the company and are therefore bound to act with care and diligence (s 180) and in good faith and for a proper purpose (s 181) which imposes duties when exercising the power of sale upon appointment. There is no requirement that an administrator or liquidator seek creditor consent when selling assets so pre-packs can work here. However, the ARITA Code of Professional Practice prohibits the charging of pre-appointment work during an external administration. Furthermore, the duty of care on selling assets (as well as s 420A for receivers) has been commonly interpreted as requiring a transparent sale process.
ARITA has recommended a new ‘pre-positioned sale’ process that distinguishes between related party sales and non-related party sales.
Sales to related parties have been a common feature of UK pre-packs. This proposal has been endorsed by the Productivity Commission in its 2015 report, ‘Business set-up, transfer and closure’.
The Federal Government has not yet released its response to the PC report, aside from the endorsement of the changes to ipso facto clauses, a safe harbour for restructuring and a shorter default bankruptcy period (included in the Innovation Statement on 7.12.15). Therefore we don’t know whether a pre-positioned sale procedure might be formally enacted into Australian law.
One point that underpins this debate is the recognition that insolvency and restructuring processes often require speed to generate optimal returns to creditors. The longer a business operates under a formal insolvency procedure, the greater deterioration of the goodwill and the less likely it will be successfully rescued. A quick sale might not provide optimal transparency but we need to remember that in a large proportion of cases the secured creditors have ultimate control over the assets and so complaints about unsecured creditor rights to review transactions might be more academic than grounded in economic reality.
It is not so much the ARITA Code that prohibits the charging for pre-appointment work, as the law. Until appointed, a liquidator has no entitlement to act, nor to charge. But work done beforehand, necessary for the administration, may be claimed on a contractual or quantum meruit basis: Skafcorp v Jarol  NSWSC 1183.
In any event, the latest position in the UK is well reviewed in “Addressing concerns about pre-packs – the “pre-pack pool””, by Eversheds LLP, Lexology 24 March 2016, and in “Diving in at the deep end”, by Duncan Grubb, Recovery, Spring 2016 at 32.
My difficulty with the concept of pre-packaging is that if a formal insolvency appointment is so damaging to sale value, perhaps we should be focusing on amelioration of the impact of formal insolvency, rather than trying to avoid the issue by neatly side-stepping it.
The final comment about the control of secured creditors highlights how the the evolution of pre-packs in the UK has in fact undermined stated policy objectives. The abolition of administrative receivership (through the Enterprise Act reforms) was supposed to promote the collective nature of administration procedures. However, secured creditors now retain effective control of many administration outcomes through widespread pre-packing. So long as there remains an expressed legislative intent for a ‘creditor democracy’ in UK and Australian administrations (through the provision for substantive creditor meetings), pre-packing should remain an exceptional practice.