As highlighted in previous posts, the very core of the pre-pack that makes it such a strong rescue process – the ability of the IP to sell a company’s assets without the approval of creditors, continues to be the main criticism of the practice particularly of course, among creditors.
Despite the last revision of SIP 16 in November 2013, there is still a fair amount of unrest surrounding pre-packs. In March 2014 the Government commissioned Teresa Graham CBE to review the regulatory regime that applies to pre-pack administration sales (the Review). The Review was published by the Government in June 2014.
In January 2015, the Joint Insolvency Committee (JIC) issued a revised version of SIP16 for consultation. The consultation is open until Monday, 2 February 2015. This new version appears to be based largely on the 6 recommendations made in the Review. There is particular emphasis on connected parties following the Review’s academic research which showed that a new company in a connected pre-pack was more likely to fail than a new un-connected company. It also appears to keep the emphasis in the Review of a ‘comply or explain’ process focusing on satisfactory marketing procedures and the use of appropriate qualified valuers.
Recommendations contained in the Review
- Connected parties should be given the option to approach a ‘pre-pack pool’ where they will disclose details of the deal to members of the pool to opine on. A positive or negative opinion from the pool will be referred to in the SIP16 as well as any decision of the connected party not to approach the pool. This creates independent scrutiny yet maintains the secrecy (and the strength of a pre-pack) before the event.
- Connected parties can complete a viability statement on the new company, again on a voluntary basis. This would confirm how the company will survive at least 12 months from the date of the statement. The administrator should send the statement to all creditors within 7 days of the sale. This will force the buyer to consider whether the transaction is actually commercially viable. It may also help any IP appointed in the future if the new company fails when he/she considers any recovery action against the directors.
- All marketing must comply with ‘six principles of good marketing’ with any deviation must be brought to the creditors’ attention. Where the IP claims that marketing is not possible or that it will harm creditors’ prospects of recovery, he/she must explain why it has not been done. This is an extra step forward from the revised SIP16 in November 2013 which simply required an explanation of what marketing had been done but no mention of where (or why) it had not.
- Valuations must be carried out by a valuer who holds professional indemnity insurance (PII). The reason behind this is that issuers of PII place their own rigorous checks on those who apply for cover. Therefore, this provides creditors with extra comfort that someone who will represent a fair value for the business/assets will conduct the valuation. An IP must explain his/her choice not to select a PII covered valuer.
- The industry’s recognised professional bodies (having the right practical experience) should monitor compliance with SIP16 in place of the Insolvency Service.
- A new SIP must be drafted.
It will be interesting to see the feedback received next week and if these measures will begin to control the undesirable behaviour outlined the Review. If they do not, the Government may (having already reserved the power to) impose legislative regulation on administration sales.