Monday, January 18, 2010

Move to Britain to shed your debts and carry on as usual

British bankruptcy courts are very lenient. They tend to rubber-stamp prepackaged bankruptcy agreements. Before filing a bankruptcy case debtor and creditors can negotiate an agreed upon plan. The idea is that the bankruptcy petition can then be filed and the plan proposed and confirmed with much less time and expense. There is however no guarantee that all debtors will be equally treated. In Britain, the "pre-pack" negotiations are often with only some debtors but the courts still approve the agreements concerned. Paying only some selected debtors means that important business relationships can be preserved -- but those who get nothing are not at all happy

BRITAIN is in danger of becoming the "bankruptcy brothel of the world", it was claimed yesterday, as furious creditors prepared a landmark legal challenge over the country's largest pre-pack administration. Bertrand des Pallières, who saw the entire investment of SPQR Capital, his hedge fund, wiped out in the pre-pack of Wind Hellas, the Greek telecoms group, in August, criticised the English courts for allowing foreign companies to move to the UK and exploit the controversial restructuring tool.

Mr des Pallières and other investors, who lost a combined €1.5 billion ($2.3bn) in the pre-pack, are preparing a lawsuit that will accuse Wind Hellas of “bankruptcy tourism” and question its right to use British bankruptcy law. Mr des Pallières’s principal objection is that Wind Hellas reregistered as a UK company two weeks before it entered the largest pre-pack administration to date, a circumstance that he asserts is a “blatant and offensive abuse” of the law. Other struggling companies are planning on using the same tactic, Mr des Pallières says. “If nothing is done, London will become a bankruptcy brothel for low-life businesses to come from all over and take advantage of the British system to dump some of their debts and move on,” he said.

That and other such criticisms are the latest in a series of attacks on pre-packs, which are under huge scrutiny because they allow businesses to negotiate deals in secret with some of their lenders and creditors to the detriment of others, who typically end up with nothing.

Pre-packs are particularly controversial because the process is often driven by the existing owners and management, who then remain in control of the business, as happened in the Wind Hellas case. Dozens of high street names have been resurrected under pre-pack deals in the past few years, including MFI, the furniture chain, Karen Millen and Oasis, the fashion retailers, the Laurel Pub Company and Cobra Beer.

European law permits companies to relocate for bankruptcy and other purposes but a UK court has never addressed the question of how long a company using a contested pre-pack must be registered in the UK to do so.

Karl Clowry, a corporate partner with Paul Hastings, the law firm, said: “Other businesses are undoubtedly considering coming to the UK to use our insolvency system, and a lawsuit that clarifies how and when this is appropriate would be watched extremely keenly.”

Mr des Pallières is among many critics who believe that pre-packs are fundamentally unfair. “Debts and contractual commitments must mean something,” he said. “If British courts will allow a family to be chucked out of their home because they cannot pay their debts, why is it possible that a big business backed by reputable advisers can defy gravity and not have to honour its debts in the same way?”

R3, the professional body for the UK insolvency industry, declined to comment on Wind Hellas or on the issue of companies relocating to the UK for bankruptcy. Peter Sargent, the president of R3, said: “Pre-packs are a very misunderstood insolvency tool, and the benefits — for example, the numbers of jobs saved — are often lost in concerns over the impact on unsecured creditors.”

Wind Hellas could not immediately be reached for comment.

Original report here

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