From 1 November 2015, additional marketing and disclosure requirements will have to be satisfied by administrators completing pre-packaged sales.
The revised Statement of Insolvency Practice 16 (SIP 16) comes into force on 1 November 2015.
SIP 16 is a best practice guide for insolvency practitioners to follow when they are considering a pre-packaged sale of a distressed business in an administration. It aims to include the recommendations put forward in the Graham Review of pre-packaged administrations that was first published in June 2014.
Importantly, SIP 16 now sets out a list of ‘marketing essentials’ in its Appendix, which the administrator is obliged to consider. These 'marketing essentials' are:
- Broadcast – to make the business’ availability known to the widest group of potential purchasers
- Justify the marketing strategy – to explain to creditors what the reasons are for the marketing and media strategy used
- Independence – the administrator should be satisfied of the adequacy and independence of any marketing, particularly where the business has been marketed prior to his/her appointment
- Publicise rather than simply publish – marketing should be for an appropriate length of time and creditors provided with reasoning for the length chosen
- Connectivity – include online marketing and media by default, or justify if not used, and
- Comply or explain – particularly where sales are to connected parties, an explanation should be provided as to how the marketing achieved the best outcome for creditors as a whole.
The marketing essentials aim to answer critics of the pre-pack process who have made the point that a lack of proper marketing and explanation to creditors of the steps taken prior to a pre-pack being completed meant that creditors were often unable to determine if the best deal had been done.
However, as many insolvency practitioners will no doubt be aware, often a decision to arrange a pre-pack of a distressed business will need to be completed quickly and with some discretion in order for that sale to be successful. In those situations, and even more so where confidentiality is important, the new marketing essentials may be difficult to achieve.
Insolvency practitioners will now be required to obtain an independent valuation of the business or, if that is not possible, disclose an explanation to the creditors of why this wasn’t possible and how he/she was satisfied that the value of the distressed business was appropriate.
This disclosure should be included in the SIP 16 statement and delivered to creditors within seven days of the pre-pack sale being undertaken.
SALES TO CONNECTED PARTIES
In these cases, there are some additional requirements on the insolvency practitioner. It is also worth noting here that the definition of ‘connected party’ has not been extended to include secured creditors.
The pre-pack pool will be open to receive applications from 2 November 2015. A prospective purchaser may, where a connected party is involved, make an application to the pool. Upon receipt of an application, an independent pre-pack pool reviewer will review the information submitted and issue one of three opinions:
- that the pre-pack is not unreasonable
- that the case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided, or
- that the case for a pre-pack has not been made out.
The process of referring to the pre-pack pool will cost £800+VAT per application. Applications can be made online, via the website www.prepackpool.co.uk.
SIP 16 provides guidance to insolvency practitioners on the pre-pack pool. Use of the pre-pack pool is voluntary at the moment, but SIP 16 obliges the insolvency practitioner to advise any connected party considering a pre-pack that it can refer the sale to the pre-pack pool.
The administrator should disclose in the SIP 16 statement whether the pre-pack pool was approached by the connected party, or not. If it was approached then a copy of the opinion of the pre-pack pool should also be included in the SIP 16 statement.
The administrator should request that the connected party conduct a viability review and prepare a viability statement. The administrator should disclose the statement in the SIP 16 statement or state that it has not been obtained, as applicable. Again, the connected party is not obliged to conduct a viability review.
The effect of these extra disclosure requirements is difficult to estimate at this time given that the pre-pack pool hasn’t launched yet and it remains to be seen how it will be utilised - especially as referrals are voluntary.
It remains to be seen what impact the revised SIP 16 has on pre-packs in administrations. From a commercial perspective, it is often the case that purchasers may not want details of the deal broadcast widely and additional disclosure requirements may put some purchasers off.
SIP 16 does recognise that, in some instances, adherence with the new marketing and disclosure requirements may not be possible. However, in these instances, an administrator will need to be prepared to justify the reasons for non-compliance and to include such reasons in the SIP 16 statement.
In many cases, a prudent administrator will already have been alerting creditors in his/her SIP 16 reports where certain marketing essentials did not take place (for example because a wide marketing campaign would have a negative effect on the value of the distressed company), the latest revision has now formalised this approach as ‘best practice’.