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

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

By Aurelio Gurrea-Martinez (Singapore Management University) 

The use of pre-packs as a restructuring tool has been traditionally popular in countries like the United Kingdom and the United States. In recent years, however, several jurisdictions around the world have adopted various forms of pre-packs. By shortening the length of insolvency proceedings, pre-packs have the ability to reduce the costs of financial distress, and especially those associated with the loss of reputation, employees, suppliers, 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 observed in some pre-packs have raised some concerns about the desirability of this restructuring tool.

In my article “The Rise of Pre-Packs as a Restructuring Tool: Theory, Evidence and Policy” published in the European Business Organization Law Review, I examine the concept and types of pre-packs generally found around the world, as well as the risks and advantages of pre-packs. I also review the empirical evidence on pre-packs before concluding with various policy recommendations for countries considering the adoption of this restructuring tool.

The article starts by distinguishing pre-negotiated reorganizations from “pre-packs”. It then discusses different forms of pre-packs observed around the world. Namely, it shows that the term “pre-pack” is used to described at least four different types of restructuring mechanisms: (i) pre-packaged administrations leading to a going concern sale popularized in the United Kingdom and recently adopted in other jurisdictions such as Spain; (ii) pre-packaged reorganizations leading to a debt restructuring, which is the type of pre-pack generally observed in the United States and partially replicated in countries like Singapore and the Philippines; (iii) “fast-track” procedures, such as those existing in South Korea and Japan; (iv) some forms of workouts that, if approved by certain majorities and sanctioned by the court, can be binding on dissenting (or some dissenting) creditors, as observed in various procedures (some of them abolished) adopted in Europe after the 2008 financial crisis and can currently be found in several Latin American countries such as Argentina, Brazil, Chile and Uruguay.

Even though the third and fourth type of restructuring tools mentioned above are often classified as “pre-packs”, these procedures should be distinguished from the type of pre-packs existing in countries like the United States and the United Kingdom. For instance, in the “fast-track” procedures existing in jurisdictions such as South Korea and Japan, the procedure can still be lengthy given that the debtor is subject to most of the formalities and procedural requirements existing in an ordinary reorganization procedure. Similarly, the workouts approved by courts found in various Latin American countries should also be distinguished from the concept of pre-packs existing in the United Kingdom and the United States. Even though those workouts approved by courts can be functionally similar to a US-style pre-packaged debt restructuring, the former does not generally require the initiation of a formal insolvency proceeding. This aspect differs from the types of pre-packs existing in the United States where companies need to file for Chapter 11 even if they can exit the procedure quickly – in some cases, even in less than 24 hours. 

In addition to these divergences in the concept of pre-packs, my article shows that pre-packs are also regulated differently around the world. For instance, in certain jurisdictions, such as the United States, pre-packs are not formally regulated in the insolvency legislation. Yet, some courts have issued guidelines to deal with pre-packs. In the United Kingdom, while the disposal of assets to connected parties in administration has been recently regulated, pre-packaged sales have traditionally been governed by a guideline enacted by insolvency practitioners. By contrast, in countries like Singapore, India, Spain, and the Philippines, pre-packs are formally regulated in the insolvency legislation. Finally, while some countries, such as India, have adopted a pre-pack that is exclusively available for certain types of debtors (small companies), most jurisdictions allow the use of pre-packs for any type of firm.

After examining the regulation and types of pre-packs existing around the world, my article reviews 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. The existing evidence on the use of pre-packs seems to support the fact that this restructuring tool can indeed reduce the length and costs of insolvency proceedings. It also shows that, on average, pre-packs can be beneficial for creditors, the survival of businesses and the preservation of jobs. Yet, some empirical studies have also highlighted certain risks associated with pre-packs, such as the existence of sales to connected parties, at least in the context of UK-style pre-packs (Frisby, 2007; Walton et al, 2014), and the fact that debtors reorganized by way of pre-packs often have lower post-bankruptcy earnings than those that were reorganized without pre-packs (Lopucki and Doherti, 2003).

My article concludes by assessing whether, and if so how, countries should adopt pre-packs. While the adoption of pre-packs can create several advantages, especially in emerging economies and more generally in countries with inefficient insolvency systems, it is argued that the optimal implementation of a system of pre-packs depends on several factors such as a country’s market and institutional environment as well as the type of pre-pack to be adopted. Based on these factors, my article suggests different policy recommendations for the adoption of pre-packs across jurisdictions.