Following a couple of delayed starts, the new provisions relating to pre-pack administrations are finally coming into force. The new Statement of Insolvency Practice (SIP) 16 was issued on 1 October 2015 and will apply to all pre-packaged sales in administrations commencing after 1 November 2015. A copy of the new SIP 16 coming into effect on that date can be found here. The pre-pack pool will be operational from 2 November 2015 (1 November 2015 falls on a Sunday).
The objective of the change is to improve transparency in pre-packaged sales in administration, particularly where the purchase is being made by a party connected to the insolvent company concerned.
In all pre-pack administration sales to connected parties commencing after 1 November 2015, the insolvency Practitioner concerned must ensure that the purchaser “is aware of their ability to approach the pre-pack pool and the potential for enhanced stakeholder confidence from the connected party approaching the pre-pack pool and preparing a viability statement for the purchasing entity”.
An approach to the pre-pack pool is therefore voluntary and as part of the process, the purchasing party must prepare a viability statement to demonstrate that the purchasing entity will be viable and capable of surviving for a period of at least twelve months from the date of the proposed purchase. The viability statement will have to include details of what changes are being made to the business by the purchasing entity, in order that it will not fail.
It is understood that the pre-pack pool will charge a fee of £750 plus VAT for its report, which will be payable by the purchaser.
The approach to the pre-pack pool will be via the pre-pack pool website, which will be launched imminently and will take the form of a questionnaire. Once that has been completed a member of the pool will provide a written opinion on the proposed sale. There will be no dialogue between the purchaser and the pool member, once the questionnaire has been submitted.
When reporting on the sale following his appointment, the administrator is obliged to advise creditors whether the pre-pack pool has been approached by the connected party and if so, that he has requested a copy of the opinion given by the pool member. He must also state that he requested a copy of the viability statement. If one or both are provided, he must enclose copies in his report to the creditors of the failed company. If they have been requested and not provided, he must state this also.
It is important to note that the insolvency practitioner’s role is to advise the failing company only. It is not part of his role to advise the directors or the purchasing company. They can and in our opinion, should take their own independent advice throughout the process.
The new SIP 16 also sets out prescriptive rules relating to marketing of the business before a pre-pack sale to any party, whether connected or not, is carried out, in its appendix. The main principles are as follows:
- The business should be marketed as widely as possible, proportionate to the size of the business.
- The marketing strategy must be justified, with explanations of the reasons underpinning the marketing and media strategy undertaken.
- Prior marketing of the business by the company before the insolvency practitioner was approached is not sufficient to justify no further marketing being carried out. He must be satisfied as to its adequacy and independence.
- Marketing should have been carried out for an appropriate period of time to satisfy the administrator that the best achievable outcome for creditors has been achieved.
- If the business has not been marketed via the internet, the decision not to do so must be justified.
- Where the purchaser is a connected party, the administrator must explain how the marketing strategy adopted by the company has achieved the best result for the creditors as a whole in all the prevailing circumstances.
The company must also ensure that any valuations obtained are carried out by appropriate, independent valuers who have adequate professional indemnity insurance for the valuation performed. The same applies to the administrator in respect of any valuations he intends to rely on.
It will be apparent from the above, that the “bad press” surrounding pre-pack sales in administration, particularly to connected parties, is being taken very seriously by the ultimate regulator of the insolvency profession. So much so that if the above measures do not achieve the desired result within five years commencing on 26 May 2015, the Small Business Enterprise and Employment Act 2015 empowered the government to implement appropriate legislation to govern the powers of an administrator to effect sales to connected parties. The message is therefore clear.
We have stated in other areas of this site that when a company is insolvent, the prime duty of its directors is to its creditors. In our view, it appears that creditors in general and the Insolvency Service in particular, have formed the view that this fundamental principal is not being properly observed in pre-pack administration sales to connected parties. It is therefore now up to the insolvency profession to rectify this apparent misconception.