Tuesday, 29 October 2013

Prepacks and reporting to creditors: What does the new SIP16 mean to you?

The new Statement of Insolvency Practice 16 (SIP 16) “Pre-packaged sales in administration” comes into force on 1 November 2013.

Insolvencypractitioners who negotiate sales of all or part of a distressed company’s business and assets with a proposed purchaser prior to their appointment, with a view to the sale being completed on or shortly after their appointment, will be familiar with the requirement to report on the terms of the sale to creditors: the first version of SIP16 has been effective since 1 January 2009. However unsecured creditors have continued to criticise the process of pre-packs and argue that the information about the sale is too little, too late. New SIP 16 aims to address some of this criticism.

The importance of complying with SIP 16 is well understood by insolvencypractitioners and the emphasis of new SIP 16 is to ensure that creditors and other interested parties retain confidence in the professionalism and independence of insolvency practitioners and the benefits of using the administration process. To ensure this independence, insolvency practitioners should take care not to advise the directors but recommend the directors obtain their own professional advice about the options facing a distressed company.

It is clear that the new SIP 16 is looking for greater transparency and accountability from insolvency practitioners in their notification to creditors and the administrators’ proposals. The list of information to be supplied to creditors has not substantially changed, however insolvency practitioners will be required now to analyse and evaluate the information. For example, what were the outcomes of any consultation with major creditors or any marketing activities?

To address a major concern voiced by creditors, there is considerable focus on the price paid for the business and assets and their valuation. The basis of the valuation and the reasons for adopting it must be given. Any discrepancy between the valuation and the sale price must be explained.

New SIP 16 also aims to accelerate the information process for the benefit of creditors. The present requirement to provide a detailed explanation and justification of the prepack sale has been given a new deadline of within 7 calendar days of the transaction. If this was not challenging enough, insolvency practitioners must add their confirmation that the intended statutory purpose can be achieved by the prepack sale and that the price is the best that could reasonably be obtained in all the circumstances. The increased transparency of the valuation process will be of great assistance to insolvencypractitioners in the making of these judgments.

More explanation has to be given for any gaps or delays in the information to creditors: if no marketing was done, a reason must be given. If the first notification is not given to creditors within 7 days of the sale, the reasons for such delay must be supplied.

The other common criticism of prepack sales, that the purchaser has been involved in the business being sold, is addressed by various additional disclosure requirements contained in the new SIP 16. The importance of the company’s directors obtaining their own independence advice throughout the sale process is emphasised in SIP 16.

The FWJ Insolvency team has considerable experience of prepack sales and can advise insolvency practitioners or purchasers on all aspects of any insolvency sale or creditors who have any concerns about the conduct of a business sale. FWJ can also advise the directors or former directors of a distressed business throughout all stages of any insolvencyprocess, upon any proposed sale or in connection with any investigations into their conduct as directors or claims against them.