The Sun Is Setting: Is It Time to Legislate Pre-Packs?

By John Wood (Lancashire Law School, University of Central Lancashire)

In the UK, pre-packaged administrations (“pre-packs”), while few in number, receive widespread attention due to the controversial outcomes that they often produce. The pre-pack process seems to have gained much exposure in recent years, but it is by no means a new concept. The negative reputation that pre-packs have resides with the lack of transparency that surrounds the process, in addition to connected parties purchasing the old company. Such an outcome leaves many creditors frustrated with both the lack of information received and the diminutive monies recovered for what they are owed.

Due to the sustained criticism of pre-packs, the British government reviewed the process to detect weaknesses in the UK’s company law framework and to ensure that the UK remained a competitive and attractive place to conduct business. This led to the Graham Review (“Review”), which made six recommendations that have since become somewhat essential to the survival of pre-packs as a non-legislative procedure. Ministerial pronouncements have put the profession on notice that, unless they take proper steps to produce substantial compliance with the Review’s findings, then legislative power will be exercised. While no further action has been taken, the Review appears to have attracted widespread support. The Review proposes non-legislative action, but the article examines whether, over time, legislation will become inevitable. What is therefore required is a balanced evaluation and critique of the Graham proposals—one that is capable of providing some form of yardstick against which to test the quality of any legislative initiatives which may be taken in the future.

The full article, published in 67 Northern Ireland Legal Quarterly 173 (2016), is available here.

The Ownership and Trading of Debt Claims in Chapter 11 Restructurings

posted in: Claims Trading | 0

By Victoria Ivashina, Ben Iverson, and David C. Smith

The role that active investors play in Chapter 11 reorganization is hotly debated in bankruptcy circles. In our paper, “The Ownership and Trading of Debt Claims in Chapter 11 Restructurings,” we collect comprehensive data on individual claims for 136 large firms that filed for Chapter 11 protection to empirically test how active investors might influence the bankruptcy process. Our data allows us to observe the identities of over 77,000 claimants and precisely measure both ownership concentration as well as claims trading for these cases.

We find evidence that firms with more concentrated capital structures are more likely to enter bankruptcy with pre-negotiated or pre-packaged bankruptcy plans, suggesting that negotiations are easier when creditors are not dispersed. In addition, even if they do not have a pre-packaged plan, firms with more concentrated ownership tend to exit bankruptcy more quickly and are more likely to emerge from Ch. 11 intact rather than being sold or liquidated piecemeal.

In the second half of the paper, we turn to the question of how claims trading in bankruptcy affects the resolution of the case. We find that trading during bankruptcy tends to concentrate ownership even further, and that the bulk of claims purchasing is done by hedge funds and other active investors. Interestingly, as these active investors enter the capital structure the overall recovery rate for the case tends to decrease, suggesting that perhaps active investors shrink the size of the overall “pie” in their efforts to obtain a larger piece of it.

The full-length article can be found here.