Some thinking about insolvency pre-packs, panels and more

In a newspaper article of 20 April 2020* promoting a new ‘restructuring business’, some ‘new thinking’ is offered on changes needed to meet what is said to be an expected ‘insolvency deluge’.

The thinking, in relation to pre-packaged insolvencies and an insolvency panel, is not new but it usefully adds to the list of reforms insolvency law and practice should consider.

Pre-packs

The use of pre-packs has been around for a while and apart from the Productivity Commission Report of 2015, we have not assessed them to the degree of the academic, professional and government attention given to them in the UK over the last 15 years: see Kayley Vending Ltd, Re Insolvency Act 1986 [2009] EWHC 904 (Ch) (15 May 2009) and these Australian articles, in 2011 and 2012, before the UK reforms were implemented: Pre-pack transactions in Australia (2011) 19 Insol LJ 235, E Poulos and A McCunn; A Comparative Analysis of Anglo–Australian Pre–Packs: can the means be made to justify the ends? (2012) 21(3) International Insolvency Review 143, M Wellard and P Walton – cited in Korda, in the matter of Ten Network Holdings Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2017] FCA 914.

They have received endorsement in Australia from Richard Fisher, a Commissioner on the 1988 Harmer Inquiry, and Nick Crouch, a Sydney insolvency practitioner. Former Senator John Williams, who now chairs the ASBFEO insolvency practices inquiry has also spoken in their favour.

Pre-packs do raise concerns about their process, transparency and fairness. While insolvency law generally has a focus on expedition, pre-packs are criticised for exceeding legitimate boundaries.

UK

Following various reviews in the UK, they were seen as offering value in dealing quickly with an insolvent or struggling business but with regulatory processes needed to ensure their legitimacy. A sale of the business to connected parties, debt-free, is an area of regulatory concern. Additional regulatory measures applied have included professional guidance – ‘SIP 16‘ – and the creation of the ‘pre-pack pool’, a review body.

Pre-packs remain under review in the UK through its Small Business, Enterprise and Employment Act 2015 which created a power for the government to impose conditions on pre-packed sales to connected parties. The UK Insolvency Service is conducting a review of pre-packs with a view to seeing whether further regulation is needed. The power under the Act expires at the end of June 2021 unless exercised before then.  This extension, from 26 May 2020, was granted by s 8 of the Corporate Insolvency and Governance Act 2020.

A briefing to the UK parliament of December 2019 gives an objective account of their operation.

Ombudsman inquiry

They may also come up as an issue in the outcome of the Australian Ombudsman inquiry into insolvency practices, in particular given that John Williams chairs that group, and Nick Crouch being on the advisory panel.

An insolvency panel

The second idea in the newspaper article is to create an insolvency panel to assess and if appropriate ‘ratify pre-pack deals’, something in the nature of the Takeovers Panel. The aim is to ‘move us away from the adversarial approach to insolvency, where the focus is often on trying to pin the blame for the collapse on someone …’. This could ‘play a role in reviewing other matters, such as administrators’ fees’.

This idea is largely the same as the pre-pack pool in the UK, although, if that pool is to survive, its voluntary access may come up for review.

The need for alternative dispute resolution processes in insolvency also comes up in the Ombudsman inquiry.

The role of the courts

But there is a broader issue. The need for insolvency practitioners to seek court approval across a range of matters should be reviewed. Court applications necessarily consume time and what limited money is available, and in the SME sector, where most insolvencies arise, they are simply not financially feasible. The courts’ time and resources could be better spent.

Corporate insolvency has yet to complete its process of adopting the many positive features of bankruptcy law, one being its acceptance of the commercial and professional decision making of trustees; nevertheless, subject to regulatory or judicial review. An example would be to remove the need for liquidators to have the court approve funding agreements and settlements.

As to fees, bankruptcy law offers a non-court process that could extend to corporate insolvency.

There are other opportunities to reduce court involvement in both bankruptcy and liquidation.

Once that review is conducted we could then look at decision-making below the court level in the nature of an expert panel. However experience tells us that this will not necessarily lead to a reduction in time and costs, given the inevitable ‘adversarial nature’ of business and the professions.

Mediation and other ADR processes may be better options.

Independence

Lastly, the article refers to the issue of independence and conflicts of interest in insolvency, in particular given the big accounting firms’ breadth of audit and advisory work. That, in the context of SME insolvency, safe harbour, Virgin Australia, and ARITA’s independence – ‘its the law’ – direction to its members, will be the subject of later commentary on Murrays Legal.

* See New thinking for insolvency deluge, Australian Financial Review, 20 April 2020

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