The Statement of Insolvency Practice (SIP) 16, which came into effect on 1st November 2015, offers comprehensive guidelines for insolvency practitioners involved in a pre pack administration process.
A pre pack administration refers to an insolvency method where the assets of a financially troubled company are sold off.
There are times when these assets are acquired by ‘connected parties’ related to the insolvent firm, leading to potential distrust and concern among the creditors.
For businesses considering this route, we are well-equipped to provide guidance on the suitability of a pre pack administration. They have a widespread presence with offices across various UK regions
Pre pack sometimes viewed as unethical
The morality of such sales has been scrutinized by the general public and trade creditors who are owed by the insolvent firm. It’s understandable to see the doubt that has overshadowed this insolvency method previously, and recognize the concerns of creditors when directors helm a new enterprise.
To address these reservations, the Insolvency Service rolled out SIP 16. The aspiration is that with more comprehensive data shared with creditors and a clearer understanding of the whole procedure, there will be a broader embrace of pre pack sales
The SIP 16 Statement
This statement is crafted by the insolvency practitioner, outlining the rationale behind choosing a pre-packaged sale and discussing other options that were weighed.
In an ideal scenario, this document should be handed to creditors when they are informed of the sale, but at the very latest, within a week after the pre pack deal. If there’s a delay in this, creditors should receive a justification for the holdup.
SIP 16 touches upon several pertinent topics, such as:
Differentiation of IP roles
When a company faces insolvency and contemplates a pre pack administration, two primary roles of the insolvency practitioner emerge:
- A consultative role concerning the company’s financial distress.
- Serving as the administrator for the pre pack initiative.
According to SIP 16, an IP engaged to guide the company through potential insolvency paths might not be the same expert designated to supervise and execute the pre pack transaction.
Insolvency practitioners need to clarify to directors that their responsibilities don’t encompass offering advice at a ‘director’ capacity. Directors should be encouraged to pursue legal advise independently.
Furthermore, directors must be informed that any assessment of business assets should be undertaken by a RICS registered valuer
Marketing the business
Promotion plays a crucial role in the pre pack sale, especially from the creditors’ perspective, aiming to optimize their returns. Employing a range of channels, including digital platforms, is essential to ensure the sale reaches the broadest audience, considering the company’s scale.
A well-defined marketing approach should be established and elaborated upon in the administrator’s documented statement. The IP’s independent promotional efforts, alongside those initiated by the company directors, are vital to uphold the integrity of the procedure.
Creditors will closely examine the duration for which the business was advertised. The administrator must offer explanations for this duration and all other promotional decisions.
Full disclosure
Under the provisions of SIP 16, insolvency practitioners are obligated to comprehensively illustrate how a pre pack sale is the most favorable outcome for creditors. If the directors of the distressed company are the ones acquiring the assets, as opposed to an external party, the explanation should be more in-depth to adequately justify the decision.
Mandated disclosures under SIP 16 encompass:
- The manner in which the administrator first became acquainted with the company.
- Their degree of engagement before their official appointment.
- The alternative strategies weighed once the company’s insolvency was established.
- Any attempts to liaise with creditors or their delegates, and if such efforts were absent, the rationale behind it.
- The reasons for not operating the business as an ongoing entity during the administration phase.
- The promotional strategies employed for the business.
- Specifics of the appraisals conducted, including the identities and credentials of the appraisers.
- The identity of the asset buyers, the acquisition date, and any affiliations they might have with the distressed company.
- A breakdown of the assets transacted.
- The revenue generated from the sale and any associated payment conditions.
These stipulations are exhaustive and, from the perspective of an unsecured creditor, encapsulate the pivotal aspects of a pre pack administration. The overarching theme of SIP 16 is to enhance creditor returns. Given that some pre pack transactions have faced legal challenges previously, the hope is that SIP 16 introduces heightened clarity to the entire procedure.
Being at the forefront of corporate recovery, we stand ready to offer expert advice on the most suitable path out of administration. With a widespread presence through local branches, we extend the opportunity for a complimentary consultation on the same day.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.