With effect from the 1st November new rules were introduced which seek to address some of the perceived concerns relating to a lack of transparency and independence in “pre-pack” Administration sales.
The term “pre-pack” is used to describe the process where a company is put into Administration and its business or assets are immediately sold under a sale which was arranged before the Administrator was appointed. The use of pre-packs has led to controversy as creditors are suspicious when businesses are placed into Administration and are then sold to a connected party (often the directors) on the same day.
Statements of Insolvency Practice 16 (SIP 16) came into effect on 1st November and introduced greater requirements in respect of marketing the business to be sold, approaching a “pre-pack pool” to provide independent assessment of the proposed sale, the provision of a ” viability statement” and supported by an independent professional valuation.
The aim of SIP 16 is to put insolvency practitioners on notice of greater scrutiny of transactions where there has been a sale to connected parties. The practitioner needs to act and be seen to be acting in the interest of creditors as a whole and importantly, to be able to demonstrate this.
The most significant change to the rules is the introduction of “pre-pack pool”. SIP 16 advises insolvency practitioners to ensure that any potential purchaser who is a connected party is aware of their ability to approach the pre-pack pool and the potential for enhanced confidence if the purchaser does this and also prepares the viability statement. The expectation is that the pool will assess the evidence provided and confirm one of the following:
- The pre-pack is not unreasonable.
- The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided.
- The case for pre-pack has not been made out.
Once the rules have been changed to ensure that insolvency practitioners are subject to more compliance requirements the introduction of the pre-pack pool assessment may not be as significant as envisaged. This is due to the fact that the onus is on the Buyer to approach the pool and provide any appropriate viability statement and they may simply choose not to do so. There is no absolute requirement on them to do so.
For more information on the changes to the Rules or for advise in relation to Administrations or other general corporate insolvency matters please contact our corporate recovery team on 0845 050 1958.