Helen Pickard identifies a number of recent changes to pre-pack sales, which should improve transparency but may reduce their effectiveness as a rescue tool
1 November 2015 may herald a brave new world for pre-packaged, or “pre-pack”, sales. From that date, insolvency practitioners will be required to adhere to new best practice guidance when dealing with pre-pack sales in the form of the revised Statement of Insolvency Practice 16 (“SIP 16”).
Pre-pack sales can be an appropriate rescue tool for failing companies as they enable a business to be sold to a buyer either as a going concern or limited only to its assets prior to the appointment of an administrator, who will then effect the sale on, or shortly after, their appointment. However, pre-packs are often criticised by creditors for lack of transparency and fairness. Sometimes there is the whiff of a cosy deal, especially when, as is often the case, the buyer is a connected party who rises, phoenix like, from the ashes and takes on the business free from many of its liabilities.
The revised SIP 16 follows the government-commissioned independent review into pre-pack sales, led by chartered accountant Teresa Graham CBE. The Graham Report recommended a number of significant changes to the way pre-pack sales are handled by insolvency practitioners, focusing on the lack of transparency and providing greater reassurance to creditors.
Key changes
Marketing
A new marketing essentials guide has been produced setting out marketing activities that the distressed company should undertake to ensure that maximum consideration is achieved for the benefit of all creditors. An appropriate strategy should be adopted and the marketing should be as wide as possible (including using online forums) and last for an appropriate amount of time. Failure to comply with the guide will result in the administrator being required to explain in detail the reasons for not doing so and why the marketing strategy adopted was still appropriate.
Valuation
Any valuations of the company or assets should be carried out by an independent valuer and, if a valuation is relied upon, the reasons for doing so should be justified.
Disclosure
The administrator must disclose to creditors all information relating to the pre-pack administration, including details of:
- why a pre-pack sale was undertaken and all alternatives considered;
- when the administrator was first introduced to the company and the extent of their involvement prior to appointment as administrator;
- the transaction itself, with a particular emphasis on explaining all details of connected parties, the nature of their relationship and the extent of their involvement in the pre-pack administration; and
- the sale consideration, any conditions in the contract, any options, buy-back agreements or other agreements and whether the sale is part of a wider transaction.
Timing
The SIP 16 statement should be provided along with the first notification to creditors and, at the very latest, within seven days of the transaction. Failure to meet this requirement will again require an explanation from the administrator.
Connected parties and pre-pack pools
In addition to the general changes for all pre-pack sales, the revised SIP 16 places ever greater scrutiny on pre-pack sales where the purchaser is a connected party (defined in sections 249 and 435 of the Insolvency Act 1986). The following new initiatives have been introduced:
“Pre-pack pool”
This is a pool of independent reviewers who will scrutinise pre-pack transactions where the sale is to a connected party. It is intended that the reviewers are business people who are not licensed insolvency practitioners and will give an independent opinion on the overall transaction. The aim is to give assurances to creditors that the best result is being achieved for them even if the sale is to a connected party, and their opinion should be annexed to the SIP 16 statement. At the time of writing, the pool is yet to “go live” so it is not clear how well this initiative will work in practice. However, its success is likely to rest on the pool’s ability to review transactions quickly while not losing the integrity of the process.
A viability statement
This is a statement provided by the connected-party purchaser setting out how the new entity will survive for at least 12 months following the purchase. Although there is no formal obligation on the connected party purchaser to provide this statement, if it is not provided, the administrator should notify creditors of this.
From 1 November 2015, SIP 16 will be monitored by the Joint Insolvency Committee and all notifications should be sent to the particular administrators’ regulatory authority.
What does this mean?
The requirement in the new SIP 16 for stringent marketing, independent valuations and enhanced disclosure (particularly for sales to connected parties) should, if effective, silence critics over a pre-pack sale’s lack of transparency, but at what cost? Will the correct balance be achieved? For a distressed business, pre-pack sales can be a lifeline, but the revised SIP 16 has the potential to limit the effectiveness of pre-packs as a rescue tool, as it takes away the speed and confidentiality in which a sale can take place.
In practice, the ongoing effectiveness of the pre-pack sale as a rescue tool for businesses and the success of the new SIP 16 to enhance creditor confidence in the process will, ultimately, depend on how insolvency practitioners implement these new guidelines. SIP 16 is still only voluntary, and therefore there is some flexibility for administrators, so long as any non-compliance is justified. However, a cavalier disregard of SIP 16 will not work: the government has made it clear that, if the industry fails to adopt these measures, new legislation will be implemented banning pre-pack sales to connected parties.
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Helen Pickard is an associate in the real estate dispute resolution team at Nabarro LLP
