Less Pre-Packs Likely Due Greater Regulation…
Insolvency Practitioners (“IP’s”) up and down the country have been issued with revised draft versions of the Statement of Insolvency Practice 16 (“SIP 16”) this month, being the regulation statement for pre packaged sales in administration. The revised statement proposes a number of changes likely to put off many from the pre-pack process with the majority of IP’s now believing that if these changes are imposed, they will be forced to either, go back to negotiating sales after the Administrators appointment (causing a break in trading prior to a sale being completed), or simply using the less stringent liquidation process.
For those of you previously unaware of SIP16, it is one of a number of statements initially issued as best practice guidance for IP’s to follow, but is now part of regulation. Despite there being only approximately 700 pre-packs a year, pre-packs have experienced huge publicity resulting in SIP16 being continually reviewed, reported on and revised since its introduction.
The latest revisions to SIP16 have resulted initially from the Graham Report, being a report done in June 2014 by former accountant, Teresa Graham CBE (an advisor to the Secretary of state, HMRC and many PLC boards and associations) who reviewed the process for Vince Cable in a bid to clean up its alleged miss-use. The Graham Report gave various recommendations to government and included a re-drafted SIP16 statement with an emphasis on “COMPLY OR EXPLAIN”, which was accepted by government and has since been reviewed by The Joint Insolvency Committee (JIC). The JIC has since produced the current revised version for consultation until 2nd February 2015.
What are the proposed Changes to SIP 16?
Many changes have been recommended however the main changes can be summarised as follows:-
- MARKETING – The increased requirements here are comprehensive, they are:
Agents need to broadcast to everyone and not just people in the same industry.
IP’s must justify the media used by explaining why it’s suitable over other media.
Prior marketing of the Company must be disclosed but cannot be solely relied upon.
IP’s must market the business for an appropriate length of time and justify why they have marketed the business for that chosen length.
Some form of internet marketing must be used along with other methods.
IP’s must demonstrate better why the best outcome was achieved. The emphasis here is put on connected party sales.
- PRE-PACK POOL – It is proposed that a pool of business leaders should be formed n order for existing directors of the insolvent company to consult with on whether they consider the proposed pre packaged administration sale is appropriate. These recommendations, or otherwise, must then be disclosed in the SIP16 statement.
- VIABILITY STATEMENT – If the pre-pack sale is to a new business (usually due to it being to a connected company) an assessment should be taken and reasoning given in a viability statement as to why the new business will be successful going forward.
- PROPOSALS – Ideally the Administrator’s proposals should be sent within the 7 day from sale deadline, for sending the SIP16 statement, rather than the 8 week deadline of before. If they are not sent in this timeframe then it should be disclosed as to why not.
- CONNECTED PARTY SALES – A considerable amount of information is now required to be disclosed if the sale is to a connected party
- ROLES OF THE IP – IP’s are expected to explain their different roles in the Pre Pack Administration process, being advisors to the Company, the Directors and then on behalf of creditors once appointed as Administrator/s.
- ALTERNATIVE PROCESSES – Explanations must be given as to why the alternative insolvency processes are not suitable.
- VALUER’S – Any Valuer’s instructed should have professional indemnity insurance and this must be disclosed. If they do not have this then the IP’s are required to disclose what professional qualifications the Valuer’s have and justify why they are suitable Valuers for the instruction.
- DUTIES OF AN ADMINISTRATOR – The IP must ensure that reasoning is given as to how the duties of an administrator have been met.
As you can see, the level of increased disclosures being recommended is huge. Many, including myself, see the changes as draconian with the level of additional compliance being disproportionate to the level of benefits of the process. I can only hope that once introduced, the changes in compliance are not quite so severe as these changes would certainly see the death of pre pack administration’s which in my view, if used appropriately, is the greatest recovery process for failing businesses.
I do however wish to point out that directors and shareholders out there, who had hoped to use this process and are now questioning it, should not despair as unlike many other IP’s, Bridge Newland Limited are still confident of achieving successful pre-packs despite the ever increasing regulations. We feel confident in this view due to our vast experience of the pre pack administration process and the fact that increased transparency and disclosure requirements are easily complied with if you use the right agents, act fast and have well worded statements. Therefore if you feel that you would like a pre pack administration and wish to discuss the process further with a pre pack specialist, call me for free on 0800 612 6197.