"Pre-packs are not the problem; the problem is the insolvency."

So said Lord Drayson, The Minister of State, Department for Business, Innovation and Skills, in a House of Lords debate on Thursday 11 March 2010. He was responding to a question, prompted by the Wind Hellas case and concern about insolvency tourism, asking what action the Government will take:

"to prevent foreign companies using "pre-pack" insolvency laws to avoid debts." 

Lord Drayson also said:

"Independent studies by the World Bank have shown that the United Kingdom's insolvency framework is highly regarded - above above that of the United States, Germany and France - particularly on the basis of its protection to creditors, the costs of proceedings and the speed with which the process is able to be carried out."

and:

"The important advantage of a pre-pack, particularly in people-type businesses such as an advertising agency or a football club, is that in a difficult insolvency situation it enables the value of the business and, most particularly, the jobs to be retained. Up to 91 per cent of pre-packs lead to a situation where all the jobs in that business are preserved."

Perhaps with the Government making these points clearly it will become more widely accepted that pre-packs are a useful mechanism for preserving value when a company has become insolvent and that the UK's flexible and constructive insolvency regime is well suited to the rescue of business.

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The restructuring of Wind Hellas, a Greek telecoms company, has prompted the Sunday Times to repeat a claim by Bertrand des Pallières, of hedge fund SPQR Capital, that Britain is becoming a bankruptcy brothel.

In this high profile example of aggrieved creditors misconstruing that it is the procedure involved rather than the underlying business failure that causes loss in insolvencies, jurisdiction shopping and bankruptcy tourism have been joined by a more colourful phrase!

Not only was the Centre of Main Interests (COMI) of the relevant Wind Hellas company moved to England from Luxembourg (ie 1300 miles away from Greece rather than 1000), but it was then put through a pre-pack administration (with all the unfortunate connotations that unfortunate phrase has come to bear).

The administrators will have acted in the best interests of the creditors generally, otherwise their regulator and the courts would have been active, especially with aggrieved creditors on the scene, yet still the Sunday Times and the Mail on Sunday chose to suggest that the losses were somehow linked to the insolvency mechanism used.

This may be something of a storm in a teacup in the Wind Hellas administration, but it is regrettable that such shrieking hinders genuine business reconstruction by casting doubt on the flexible, highly-regulated UK insolvency regime, which operates subject to the scrutiny of a highly regarded and equitable court system.

Of course, a Luxembourg insolvency might have suited a particular aggrieved creditor, but the well-established COMI principle allows companies to move between jurisdictions. It’s the debtor’s choice.

In cross-border cases there will often be those who would have preferred a different insolvency regime, but while the UK continues to offer the most varied and flexible system and the experienced and regulated practitioners to make best use of it, debtors – and creditors generally – will benefit.

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