Pre-packs are a valuable business rescue tool but have often been criticised by creditors because they enable an administrator to conclude a sale without involving them. The term ‘pre-packaged sale’ refers to an arrangement under which the sale of all or part of the company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, appointment. An independent review in 2014 led by Chartered Accountant Teresa Graham CBE recommended that the standards and guidance around pre-packs should be tightened.
With a view to implementing Teresa Graham’s recommendations, a draft revised Statement of Insolvency Practice 16 – SIP 16 – has been published for consultation. The changes proposed by the draft SIP largely follow the revisions suggested by the Graham Report. The draft SIP addresses a key concern about poor practice relating to the marketing of business and assets prior to pre-pack deals. A new set of marketing essentials will be introduced, to be considered before any pre-pack deal is concluded. These include ensuring those who provide valuations are properly qualified and that the marketing has been as wide as possible (including via the internet) unless there are good reasons not to do so. Transparency will also be a key theme underpinning the revised statement, with IPs having to explain to creditors where any of the key principles of the guidance have not been complied with and why.
In particular, the draft SIP includes the following changes:
- It includes an introduction emphasising that an IP should recognise the high level of public and business interest in pre-packs and requiring IPs to plan for greater scrutiny of sales to connected parties. The draft SIP now states that it is important that the IP is seen to be acting in the interests of the company’s creditors as a whole and is able to demonstrate this clearly.
- The administrator must provide creditors with a statement (SIP 16 statement) that would enable a reasonable and informed third party to conclude that the pre-pack was appropriate and that the administrator has acted with due regard for creditors’ interests. In a connected party transaction the level of detail may need to be greater.
- Ideally, the administrator should send out his proposals for the administration to creditors together with the notification of the sale. A lengthy delay between the sale and receipt of the administrator’s proposals may confuse creditors.
- An IP must make it clear that his role is not to advise parties connected with the company in relation to the pre-pack.
- The IP’s records of the reasoning behind the pre-pack sale should also include records of all alternatives considered.
- Any valuations of the 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.
- The draft SIP sets out the marketing essentials drafted by the Graham Report and states that marketing of the sale assets should conform to these. The marketing essentials are in the following categories and set out in detail in an annex to the draft SIP:
- broadcast rather than narrowcast
- justify the media used
- publicise rather than simply publish
- connectivity; and
- comply or explain.
One recommendation of the Graham Report was the formation of a pool of 30 business people to consider proposed pre-pack transactions where the sales are to connected parties before business sales are executed. All work will be carried out via an online portal and members of the pool will be paid for each case they consider with their non-binding opinion on the transaction being anonymous and no liability attaching to any pool member for any opinion given. Good progress has been made in establishing a pool of independent advisers who will be able to review those pre-packs where the business is intended to be sold to connected parties. Successful applicants will:
- have more than 10 years’ experience at board level
- be able to act promptly when allocated a potential pre-pack
- not be bankrupt, not be disqualified from acting as a director and will have no criminal convictions; and
- not be a current licensed insolvency practitioner (although retired insolvency practitioners would be considered).
- Direct experience of pre-packing or of insolvency generally is not essential. The closing date for applications was 12 January 2015 and about 50 people have applied.
The consultation runs until 2 February 2015. It is intended that the pre-pack pool will be up and running when the revised SIP 16 comes into effect, which is expected to be by the end of March 2015.