Pre-packaged insolvency

In the United Kingdom, pre-packs have become popular since the Enterprise Act 2002, which has made administration the dominant insolvency procedure.

[4] Courts have even approved transactions that, as a "necessary evil", have made payments to the former management while leaving little or nothing to unsecured creditors.

The downside of a pre-pack administration is that it can attract negative publicity if the former directors are seen to be shedding liabilities.

A conventional bankruptcy case is one in which the debtor files for Chapter 11 relief without having agreed in advance to the terms of a plan of reorganization with its creditors.

Two procedurally difficult aspects of the process are the announcement (which must be structured so as not to trigger contractual termination provisions) and getting the requisite creditor approval.

[11] In 2009, a new entity completed the purchase of continuing operations, assets and trademarks of General Motors as a part of the 'pre-packaged' Chapter 11 reorganization.

The Chapter 11 filing was the fourth-largest in US history, following Lehman Brothers Holdings Inc., Washington Mutual and WorldCom Inc.[14] A new entity with the backing of the United States Treasury was formed to acquire profitable assets, under section 363 of the Bankruptcy Code, with the new company planning to issue an initial public offering (IPO) of stock in 2010.

The speed and secrecy of the transaction often lead to a deal being executed, about which the unsecured creditors know nothing and offers them little or no return.