Pre-Pack Pool, Quo Vadis?

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Dr. Eugenio Vaccari, Lecturer in Law, University of Essex

Failure is a fact of life in any sphere of human activity.[1] Each individual can share stories of their personal failures in life. Some of these failures make us stronger, more successful and resilient in the long run.

Beside events that only affect us in the personal sphere, there are other more “tangible” failures, which affect our profession, assets and capacity to generate income.

In this respect, companies are no different from human beings. Companies – even successful ones – may fail to invent, launch and promote a new product on the market or simply generate enough cash to cover development costs of a product that otherwise met the consumers’ favour. If failure is not limited to a single product, it may threaten the survival of the company.

However, failure may also be determined by external factors, such as a sudden lack of demand from the consumer’s side (as in the aftermath of the Covid-19 pandemic) or an unexpected increase in interest rates. These external factors – either alone or coupled with other causes – may push a company into a formal insolvency proceeding.

More frequently than not, companies that are pushed into insolvency for the pressure exerted by external factors may still be viable. Yet, the only people who have the expertise and knowledge, as well as the courage to invest in a failing business, are usually the existing owners and directors of the ailing company.

Under English law, one of the most popular methods by means of which existing owners buy back an insolvent company, thus preserving its core business and as many jobs as possible, is called pre-pack administration (‘pre-pack’).

In a “pre-pack”, a prospective buyer and key creditors conclude an agreement on the sale or restructuring of the company in advance of statutory administration procedures. In a “connected pre-pack”, the buyer is usually the seller – the owners buy back a significant portion of the company minus a sizeable amount of its existing debt.

Clearly, connected pre-packs raise issues of transparency, fairness and valuation of the debtor’s assets. Creditors may feel that they are paid a pittance while the existing owners are set free without punishment and retain the control of assets that could have generated more money if liquidated in a competitive procedure, such as through a properly advertised auction procedure.

To allay the fears of disgruntled creditors, the Government introduced in 2015 the Pre-Pack Pool (‘the Pool’). The Pool is an independent body of experienced business people that gives an opinion on whether the connected pre-pack sale is reasonable and in the best interests of creditors.

The Pool has proven effective in dealing with connected pre-packs, as evidenced by the most recent sale of Go Outdoors. In this case, the debtor was sold back by its previous owner JD Sports by means of a deal cleared by the Pool in less than 24 hours. The Pool has risen to prominence, to the extent that it has been taken as a model for recent innovations in other jurisdictions, such as the business panel in Italian alert procedures. Dr. Vaccari is working on a paper (due to be published in August 2020 in the International Insolvency Review) which will disclose the links between the English Pool and the Italian panel.

Furthermore, Dr. Vaccari has already analysed in two recent articles [2] the reasons behind the low uptake rate of this voluntary measure (less than 10% of eligible cases are referred to the Pool) and how the Pool should be reformed to deal more effectively with the risks associated with connected pre-packs.

The Corporate Insolvency and Governance Act 2020, which came into effect on 25 June 2020 (‘the Act’), presented the perfect opportunity to deal with the issues associated with connected pre-packs. It is, however, disappointing to see that the Government and Parliament have turned a blind eye on connected pre-packs and have been deaf to the requests from the industry to make the referral to the Pool compulsory in these procedures.

The Act includes several measures that are likely to make the English framework more rescue-oriented and efficient, such as a new restructuring procedure and the ban on the enforceability of ipso facto clauses. Unfortunately, no ink was spilled for a very useful mechanism on the brink of collapse.

It is to be hoped that the Pool’s latest cry for help will not end up in being a late pious expectation of salvation by means of Parliamentary intervention. There are valid reasons to believe that such an intervention is forthcoming, as section 8 of the Act revives the Government’s power to review connected pre-packs and related instruments, included the Pool. This power, originally granted by the Small Business Enterprise and Employment Act 2015, lapsed in May 2020 but has now been extended to the end of June 2021.

The publications mentioned in this article are available on Westlaw, Researchgate.net and Academia.edu. Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.


Notes:

[1] V Finch and D Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edn, CUP 2017) 123.

[2] E Vaccari, ‘Pre-Pack Pool: Is It Worth It?’ (2018) 29(12) I.C.C.L.R. 697; E Vaccari ‘English Pre-Packaged Corporate Rescue Procedures: Is there a Case for Propping Industry Self-Regulation and Industry-Led Measures such as the Pre-Pack Pool?’ (2020) 31(3) I.C.C.L.R. 169.

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