College Papers

Concept procedures to get a way out from

Concept
of the corporate rescue:

There are
various approved rescue models even though, each one of these owns a different
corporate rescue identification, having identical concepts, rules and
principles. This is mandatory to understand that how a legal system deals with
a financially distressed company before obliging the basis of corporate rescue.
Mainly, the substance of the rescue model that has took place in a respective
country based on the historical legal advancement1.

The motive
of corporate insolvency holds many characteristics, most aimed to produce
opportunities for action in favor of the distressed company instead of doing
nothing and keep waiting for the consequences2.
It is that kind of system which require the involvement of all the organs of
the distressed company to figure out when action should be taken, and which
option is to be picked up in the given circumstances. Rescue models strive to
be linked with the distressed company to play a positive role.

Relevant
procedures which are used to give a helping hand to a distressed company in
corporate rescue are;

(a)          
Company
voluntarily arrangement

(b)          
Administration

(c)           
Scheme
of arrangement

(d)          
Administrative
receivership

Any
distressed or struggling company may use above mentioned procedures to get a
way out from the problem and these are effective too. On the other hand, the company
voluntarily arrangement and administration are the two-main procedures for
rescuing a distressed company. The cork committee was established to analyze
these two recuing procedures and to make recommendations accordingly3.

What is pre-pack sale:

A pre-pack
sale is an intimate practice which grew up through the legal practice and
advanced in the administration process. The fact is that when the
administration process is initiated then it reflects as the concluding stage of
the procedure because it is considered that the all the essential moves and
arrangement has been made before starting off the insolvency process following putting
forward the name of an administrator. By this ‘anticipatory action,4
the distressed company makes itself able to get advice from the insolvency
practitioner, in order to sort out with its major creditors to sell the assets
of the distressed company completely or partially to a potential buyer and to save
the business of the distressed company. The main point of the UK pre-pack is that
it only saves the business not the company, but my viewpoint says about this is
that to save the business should be the prime thing. UK insolvency process has
accepted the pre-packaged administration and during past ten years this practice
has gained the popularity and the reason behind is its beyond doubt benefits5.
As, all the formalities have been done between company and its creditors (it
comprises of prime creditors) prior to the administrator’s taking over which
resulted in the form of taking very short time to reach to its final deal.6
As, the time and cost are directly proportional to each other so, this process
saves a lot of money apart from time saving.

A research
statistic shows that almost in 70 percent cases the insolvency practitioner had
gone with the pre-packs sale as it provide massive returns to the creditors if
compared to the rest of business sales7.

Significance of Enterprise Act 2002
on UK PRE-PACK:

The practice
of pre-packs uplifted by the Enterprise Act 2002. The management of the
distressed company and preferential creditors have got the option to appoint
the administrator and then all the responsibility lies on the shoulder of that
appointed administrator so that he or she can maintain the process of pre-packs8.
During the process, creditors are not authorized to impede to recover the debts
and the administrator has got the option to choose any method or scheme for the
distressed company and the administrator is required to keep that scheme to present
in the creditors meeting for the approval of it.

Goals of Regulations:

UK pre-packs
sale emphasis on three aims which are:

 

(a)          
To
give a helping hand to a distressed company as a going concern (the administrator
aims to save the entity instead of the company’s assets)

(b)          
To
produce a good result for the creditors of the distressed company (more
suitable when the company would be in a position of liquidation)

(c)           
To
get as much as the administrator can to give out to secured creditors9.

Required protection has been granted to the creditors by the Enterprise
Act 2002 by emphasis this point to give back to the preferential creditors.

The occurrence of the process held confidentially wile, prime
creditors might be given a chance to observe the process. The administrator is
appointed out of court process by the existing management of the distressed
company  and if the administrator thinks
that the only better option is to sell the assets of the company then the administrator
is not required to seek permission from the creditors to do so as, it is stated
in a case law namely, Re Trans Bus
International LTD and the elaboration of the decision in this case shows
that the administrator is not liable to seek permission from the creditors in
order to sell the assets of the company but if, courts directed the
administrator then the administrator is liable to get those directions10.

   In the UK, pre-packs sale the administrator
tries to locate a potential buyer to whom the administrator could sell the
assets of the company without facing any intervene by other potential buyers as
well as the creditors of the distressed company. The question relating to the
creditors of the distressed company is addressed by the law makers and the courts
that if it is taken wrongfully that the administrator is trying to produce the
maximum for the creditors in the form of repayment. However, it is denounced
that by keeping in mind that in the absence of any market the pricing will not
be certain. This thinking produces two main points first, there is no surety
that the absence of any competition would keep down the price but there is a
surety of this that it will never help in keeping the price up. Secondly, the
focus of the administrator will be on keeping the liquidation of the distressed
company on the fast track which might results in the discount of the prices of
the assets of the distressed company and to keep firm the eventual buyer11.

Discretion of administrator and the
Objective of Rescue:

The improved
administration process by the Enterprise Act 2002 has required from the
administrator some objectives to be achieved in order of preferences, initiating
the rescue process of the distress company as a going concern. While, it is
very hard to see that the administration will prepare the way for the actual
rescue of the distressed company12.
 It is an essential for the administrator
to focus on the first objective which lead the administrator towards bringing
back the company. However, here pre-packs faces a issue which is that the
administrator is usually connected with before his or her appointment as an
administrator and usually the final price of the sale has already been settled
with the potential buyer and after the appointment of the administrator this
deal is carried out quickly. Although, this process provide with an instant
solution to a financially struggling company and whose organs wishes it to be
saved, but there is anxiety that if the current condition of the distressed
company is publicized then it may create hurdles in the way of progress of the
company13
. Furthermore, the choice goes in the favor of secured creditors as it permits
them to take part in the process and make sure that they discuss terms of a
secured term. However, the position is not the same for the unsecured
creditors. The basic characteristic which is linked with the pre-packs strategy
that the distressed company is finding only one way unaccompanied the
consultation of all its creditors14.

1 H.
Hansmann and R. Kraakman, ‘The End of History
for Corporate Law’, in J. Gordan
and M. Roe, (eds), Convergence and persistence
in corporate Governance, (Cambridge: CUP, 2004), p.33.

2 V.
Finch, ‘Corporate Insolvency Law:
Perspective and Principles’, (Cambridge: CUP, 2002), p. 125.

3 R.
Perry, ‘Corporate Rescue’, Pub. (2008).

4 S.
Harris, ‘The Decision to Pre-Pack’ 2004 Recovery (Winter) 26,26.

5 P
Walton,’ pre-packaged administrations- trick or treat?’ 2006 Insolvency
Intelligence 113,116.

6 P
Walton,’ pre-packaged administrations- trick or treat?’ 2006 Insolvency
Intelligence 113,116.

7
R3, ‘Pre-packs’ and SIP 16′( www.r3.org.uk2010)