On 31 March 2010, the UK Insolvency Service released a new consultation paper entitled "improving the transparency of, and confidence in, pre-packaged sales in administrations.

NEW RULES ON PRE-ADMINISTRATION COSTS

Insolvency Practitioners have been eagerly awaiting the implementation on 6 April 2010 of the Insolvency (Amendment) Rules 2010 (“New Rules”). In addition to the many modernising changes made by the New Rules is the long awaited inclusion of what was believed to be a statutory entitlement to recover pre-appointment costs such as in negotiating a pre-pack. as an expense of the administration (New Rule 2.67(1)(h)).

As part of the 2005 revisions of the Bankruptcy Code, Congress greatly enhanced the priority of claims asserted by suppliers of goods to debtors in the 20-day period immediately prior to a debtor’s bankruptcy filing by enacting new section 503(b)(9). This new provision raises several interesting issues, some of which were addressed by two recent cases examining the question of when such claims are to be paid.

The Language of Section 503(b)(9)

Administrations, including "pre-packs", are not capable of constituting "insolvency proceedings...instituted with a view to the liquidation of the assets of the transferor" within the meaning of Regulation 8(7) of TUPE. Where there is a sale of an undertaking by an administrator, the employees assigned to the undertaking will automatically transfer to the buyer and receive unfair dismissal protection.

Key facts

Chapter 11 focuses on preserving reorganization or going concern value over liquidation value. As a corollary, Chapter 11 assumes that the most efficacious way to achieve that result is to retain management and enable multiple outcomes either through a plan of reorganization, a series of going concern sales and even a liquidating plan. Chapter 11 enables a wide range of proposals to be put into a reorganization plan, including having the company and its management survive the process.

The much awaited EAT decision inOTG Ltd v Barke and others (formerlyOlds v Late Editions Ltd) was delivered on 16 February. As expected, the EAT has taken the view that an administration cannot amount to “bankruptcy” or “analogous insolvency proceedings” for the purposes of Regulation 8(7) of TUPE. So, on a sale by an administrator (even in a pre-pack administration) TUPE will apply.

In more detail

The full force of TUPE is relaxed in relation to insolvent transfers as follows:

In the last issue of Franchise Alert, we discussed how to spot signs of franchisee financial distress at an early stage. Here, we present some steps franchisors can take to deal with financially distressed franchisees.

Update Files

REGEN CAPITAL I, INC. v. UAL CORP. (February 18, 2011)

Summary

A recent court decision confirmed that transparent pre-pack sales can be used where they are in the best interests of the creditors as a whole. The court ruled that:

Earlier this year, the United States Bankruptcy Court for the District of Delaware ruled that a nondebtor cannot effect a “triangular” setoff of the amounts owed between it and three affiliated debtors, even if the parties had entered into pre-petition contracts that expressly contemplated multiparty setoff.1 In reaching its decision, the Court relied principally on the plain language of section 553(a) of the United States Bankruptcy Code, which limits setoff to “mutual” obligations — i.e., direct obligations between a single obligor and obligee.