TSP Corporate and Commercial solicitor, Nick Mayles, discusses pre-pack sales and the introduction on 1 November 2015 of the Statement of Insolvency Practice 16.
Pre-pack Sale: A “pre-pack” is an arrangement under which the sale of an insolvent business is negotiated before the appointment of an administrator, and then completed by the administrator shortly after his appointment. Pre-packs have long been a subject of debate, particularly when the purchaser of the insolvent business is the existing management team, or a competitor, of the insolvent company.
The Debate: The debate centres around what appear to be directly conflicting interests of the purchaser of the insolvent business on the one hand, and its creditors on the other. A purchaser would point to a number of advantages of the pre-pack process:
- it is quick and reduces the costs of administration, so achieving a better return for creditors
- it avoids negative publicity and damage to goodwill of the business, and
- it can help save jobs as a continuing business
Notwithstanding the advantages, the process has attracted criticism from creditors (particularly those without security), who may be excluded from reviewing and voting on the proposals, and are often left with unpaid debts:
- the sale is usually negotiated in private, so there is a perceived lack of transparency
- neither court nor creditor approval is required, in the same way as a normal administration, so there is a perceived lack of accountability
- there is often limited marketing undertaken, leading to concerns over the value of the business and the price paid (especially in the case of connected party purchasers)
- there may be nothing to suggest that the business will succeed under the purchaser’s control (especially where a connected party purchaser is the existing management team), and
- the process is similar to, and perceived to circumvent, the prohibited practice of “phoenix” companies
Administrators are obliged to disclose details of a pre-pack sale to all creditors of the insolvent company, within the SIP 16 Statement, but this is done after the sale is concluded (and not before).
New Statement of Insolvency Practice 16 (SIP 16): With effect from 1 November 2015, administrators have been required to comply with a new SIP 16, largely in response to the criticisms and adverse publicity surrounding pre-pack sales (especially, but not exclusively, those to connected party purchasers). The new SIP 16 seeks to deliver greater transparency and openness, in an attempt to demonstrate to an insolvent company’s creditors that the use of a pre-pack is appropriate in the circumstances.
It introduces specific initiatives and more onerous reporting requirements for administrators, who must now provide creditors with sufficient information to show that a reasonable and informed third party would conclude that the pre-pack sale was appropriate, having regard to the creditors’ interests. Where connected party purchasers are involved, administrators will need to provide greater detail in their SIP 16 Statements.
Under the new SIP 16:
- an administrator should undertake greater marketing measures of the insolvent business (and meet detailed marketing criteria)
- an administrator should ensure that any valuation of the business is carried out by an appropriate qualified professional
- a connected party purchaser should (but albeit on a voluntary basis):
- refer the transaction to a pre-pack pool of independent experts to consider and assess appropriateness of the transaction, and
- provide a viability statement of what the purchaser will do differently to ensure that the business will not fail going forward
An administrator must report to creditors whether the requirements and recommendations in the new SIP 16 have been met and, where the buyer is a connected party, whether he has approached the pre-pack pool of experts (giving details of the experts’ assessment) and whether he has provided a viability statement. Responsibility for monitoring an administrator’s compliance with the SIP 16 has passed from the Insolvency Service to the individual insolvency practitioner’s recognised body.
Conclusion: The new SIP 16 requires accredited disclosure of the sale and marketing exercise of the insolvent business showing the procedures followed, and work carried out by, the administrator. The aim is to provide greater information about, and justification for, the pre-pack sale (even though the obligations on a connected party purchaser to refer the sale for assessment to a pre-pack pool of experts, and to provide a viability statement, remains entirely voluntary). It remains to be seen whether the new SIP 16 will provide the transparency and accountability sought by creditors.
For help and advice in this area Nick can be contacted on 01206 217010 or by email at firstname.lastname@example.org