On 1 November 2015, the revised version of the Statement of Insolvency Practice 16: Pre-packaged Sales in Administrations (“Revised SIP 16”) became effective, applying to appointments of insolvency practitioners starting on or after that date. The Revised SIP 16 was the culmination of a process which began in 2013 with the commencement of the Graham Review, commissioned by the UK Government as a result of the widespread criticism of “pre-pack” administrations. Importantly, Revised SIP 16 is not legally binding, but represents an attempt by the insolvency industry to self-regulate pre-pack administrations and address the criticisms levelled at the process. It is anticipated that there will be widespread compliance with Revised SIP 16 within the UK insolvency market.
A pre-pack administration is an arrangement under which all or part of a company’s business or assets is sold immediately on, or shortly after, the administrator’s appointment to the company, with the sale and documentation negotiated in advance of the appointment. Although pre-packs continue to be recognised as a legitimate restructuring tool which enable the value of viable elements of an insolvent business as well as jobs to be preserved, pre-packs suffer from a number of criticisms, which Revised SIP 16 aims to address. This article summarises some of the key changes contained in Revised SIP 16.
Connected party sales
A large number of pre-packs (nearly two-thirds of a pool of 500 companies sampled by the Graham Review) involve a sale to a “connected party”, as defined under sections 249 and 435 of the Insolvency Act 1986. The Graham Review identified that connected party sales can be viewed as, amongst other things, a means of perpetuating failed businesses with poor business models, and of allowing businesses to be bought out of administration, free of debt, by former owners or directors who may have been responsible for the original failings of the business.
Under Revised SIP 16, connected parties are asked to make an application to a “pre-pack pool”, an independent body of experienced business people set up in response to the Graham Review, which will opine on whether it is not unreasonable to proceed with the sale. A copy of the opinion is to be included, if available, with the “SIP 16 statement” circulated by the administrator to creditors within seven days of the transaction.
The connected party is also encouraged (but not required) to provide a “viability statement” detailing how the purchasing entity will survive for at least 12 months from the date of the proposed transaction and what the purchasing entity will do differently so that the business will not fail. If provided, this will also be appended to the SIP 16 statement.
The pre-pack pool and the viability statement were the two key recommendations of the Graham Review. There has been concern about how the pool would operate and if the (now) 48-hour turnaround time for an opinion is sufficient, given the potential for a large amount of documentation to be submitted by a connected party. Furthermore, given that Revised SIP 16 is not legally binding, there is no obligation on a connected party to provide a viability statement (or, in fact, approach the pre-pack pool).
Lack of transparency and insufficient marketing
Owing to the timing of a pre-pack, creditors only receive information about the sale, through the SIP 16 statement, following its conclusion, and therefore have no ability to consider in advance the merits of the sale. This contrasts with the normal administration process, where creditors receive a statement of proposals from the administrator within the first eight weeks of his appointment and vote on those proposals at a creditors’ meeting.
In addition, many stakeholders criticise the marketing of the business undergoing a pre-pack as being insufficient, inadequate or non-existent. Although the Graham Review identified that there may be occasions when it would be in creditors’ best interests for an administrator to undertake a sale without having done any marketing, it was found that in general, the quality of the marketing undertaken in connection with a pre-pack sale is insufficient.
The Graham Review identified that “improved marketing and a fuller explanation of valuation methodology would help greatly to improve transparency”. Revised SIP 16 has adopted the Graham Review’s recommendation that all marketing for pre-packs should comply with the following six “marketing essentials”:
- Broadcast – the business should be marketed as widely as possible proportionate to the nature and size of the business – the purpose of the marketing is to make the business’s availability known to the widest group of potential purchasers in the time available, using whatever media or other sources are likely to achieve this outcome.
- Justify the marketing strategy – the statement to creditors should not simply be a list of what marketing has been undertaken. It should explain the reasons underpinning the marketing and media strategy used.
- Independence – where the business has been marketed by the company prior to the insolvency practitioner being instructed, this should not be used as a justification in itself to avoid further marketing. The administrator should be satisfied as to the adequacy and independence of the marketing undertaken.
- Publicise rather than simply publish – marketing should have been undertaken for an appropriate length of time to satisfy the administrator that the best available outcome for creditors as a whole in all the circumstances has been achieved. Creditors should be informed of the reason for the length of time settled upon.
- Connectivity – include online communication alongside other media by default. The internet offers one of the widest populations of any medium. If the business is not marketed via the internet, this should be justified.
- Comply or explain – particularly with sales to connected parties where the level of interest is at its highest, the administrator needs to explain how the marketing strategy has achieved the best available outcome for creditors as a whole in all the circumstances.
The “comply or explain” principle allows an administrator to explain to creditors any deviation from a strategy which conforms to the other marketing essentials, rather than complying with those essentials. In addition, Revised SIP 16 now provides that any valuations must be carried out by appropriate independent valuers or advisors carrying adequate professional indemnity insurance.
Although well-received, there is some concern that these revisions will result in pre-packs being costlier, when one of the current advantages of a pre-pack is reduced costs when compared to, for example, schemes of arrangement. It is also possible that some administrators may simply choose to “explain” rather than “comply” with the marketing essentials contained in Revised SIP 16, which may negate some of the potential impact of Revised SIP 16.
It is too early to see how Revised SIP 16 will operate in practice, and whether the revisions will have a substantive impact on the way pre-pack sales are viewed. It is though fair to say that Revised SIP 16 is generally viewed as being a step in the right direction in improving the public perception of pre-pack sales. There is also potential for further, more extensive reform of the pre-pack regime in coming years: under section 129 of the Small Business, Enterprise and Employment Act 2015, the UK Government has reserved the right to enact legislation controlling pre-pack sales to connected persons in the event that the insolvency industry fails to comply with Revised SIP 16. It will be interesting to see how the insolvency industry responds in the coming months and years to Revised SIP 16 and the increased scrutiny of pre-pack administrations.