Further to the review of pre-pack administration sales (“pre-packs”) by Teresa Graham CBE last year (the findings of which were published in the “Graham Report” and discussed in one of our earlier blogs, Change in Sight for UK Pre-pack Administration Regulation), the key recommendations have now been implemented in order to improve fairness and transparency especially where a pre-pack sale occurs to a connected party. They have been incorporated into a revised Statement of Practice 16 (“SIP 16) issued by the Joint Insolvency Committee on 1 October 2015 with an implementation date of 1 November 2015.
The pre-pack pool set up to scrutinise pre-pack sales will be launched on 2 November 2015 and will immediately start reviewing cases through an online portal. The updated SIP 16 (see further below) provides guidance on the pre-pack pool and advises insolvency practitioners (IPs) to ensure that any connected party considering a pre-pack is aware of their ability to approach the pre-pack pool. The hope is that use of the pre-pack pool and the provision of a viability statement by the connected party will increase stakeholder confidence in such transactions and the connected purchaser.
It has been reported that 21 reviewers have been recruited to the pre-pack pool, including two retired IPs. There have been fears that reviews by the pre-pack pool would take too long given the time pressures that often govern such transactions but assurances have been given that the process will take no longer than 48 hours. At the moment of writing, the website isn’t live but is set to be available from 21 October so that IPs are aware of the web address and have an opportunity to access the FAQs before 2 November.
Revised SIP 16
The revised SIP 16 provides further guidance to IPs in the pre-appointment period:
- They must keep records of the reasoning behind the pre-pack sale and also all other alternatives considered
- Any valuations of sale assets should be conducted by appropriate independent valuers and/or advisors with adequate professional indemnity insurance. If the administrator relies on another type of valuation, he has to disclose this together with the reason and why he was satisfied with the valuation
- A requirement to market the business/asses is emphasised, to ensure that consideration is maximized for the benefit of the company’s creditors. Marketing is a key factor in reassuring creditors and the SIP states that in marketing the IP should:
- “broadcast” (market as widely as possible)
- be capable of “justifying the marketing strategy”
- show “independence”
- “publicise rather than publish” (market for an appropriate length of time), and
- use “connectivity” (use online communications)
The IP and the purchaser will be required to “comply or explain”, i.e. to follow the recommendations or provide cogent explanations as to why the new process has not been followed.
Extra guidance has been provided on the disclosure IPs must make to creditors (“SIP 16 Statement”) on why a pre-pack was undertaken with an onus on enabling a reasonable and informed third party to conclude that the pre-pack was appropriate and that the IP had acted with due regard to creditors’ interests. When a business is being sold to a connected party, in order to assist with his reasoning the IP should attach a “viability statement” to the SIP 16 Statement prepared by the connected party demonstrating how the company will survive for at least 12 months from the date of the statement and what the new company will do differently.
The SIP 16 Statement should also attach the pre-pack pool opinion, confirm whether the pool’s recommendation was followed or state that the pool was not consulted. It also recommends that the administrator’s statement of proposals is sent to creditors at the same time as the SIP 16 Statement, effectively bringing forward the eight week deadline for the statement to seven calendar days.
Finally, note that the revised SIP 16 will no longer be monitored by the Insolvency Service but by the regulatory authorities that make up the Joint Insolvency Committee (namely, the ACCA, the IPA and the Institute of Chartered Accountants). All notifications under SIP 16 prior to 1 November 2015 should continue to be sent to the Insolvency Service but those from 1 November 2015 onwards, should be sent to the IPs regulatory authority. In the case of joint appointments where IPs are authorised by different regulatory authorities, the disclosure should only be sent to the lead IP’s regulatory body.
It remains to be seen how the pre-pack pool and the revised SIP 16 will work in practice and to what extent IPs and connected party purchasers will choose to “comply or explain”.
We will have to wait to see if disciplinary or regulatory action will be brought by the regulators if an IP fails to follow the new procedure but the Government has stated that legislation will be introduced if the industry fails to comply. To this end, an enabling clause was included in s129 of the Small Business, Enterprise and Employment Act 2015 that allows the Government to introduce regulations to ban pre-pack sales to connected parties if these new measures are not adopted. However, s129 comes with a sunset clause, meaning that the ability to introduce regulations will disappear if not enacted within five years.
So the next 5 years will be key.