Pre-packs can be a valuable tool in saving jobs, preserving asset value and rescuing businesses. However, despite the additional requirements set out in the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, which introduced mandatory independent scrutiny of pre-pack sales to connected persons, there is still the perception of a lack of transparency, especially when there is a connected party involved.
This controversy puts an additional importance on the SIP 16 statement prepared by the Administrator, which should not only be compliant with SIP 16 itself but should also be a clear and useful explanation to allow any interested party to conclude that the sale achieved was the best available outcome for creditors as a whole in all the circumstances.
An Administrator who has undertaken a pre-pack is required to send a copy of their SIP 16 statement to their regulatory body. I recently undertook a sample review of some of the pre-pack submissions made to ICAEW during 2022.
The SIP 16 statements were prepared by IPs at a range of different sized firms and involved a variety of businesses. The statements all made for interesting reading, however, there was a varying level of compliance with SIP 16. Despite the unique circumstances of each pre-pack, there were some common areas which the IPs tripped up on.
- Simple disclosure points were often missed. This includes advising if there was consultation with major or representative creditors, whether requests were made to potential funders to fund working capital requirements and whether the business or business assets had been acquired from an insolvency process within the previous 24 months. Even if these points aren’t relevant, it is helpful to explicitly confirm and explain the reasons why.
- It is also essential to discuss why was it not appropriate to trade the business and offer it for sale as a going concern during the administration. It is really important to clearly set out the considerations made in relation to other solutions or insolvency processes and why they weren’t appropriate. These explanations need to be clear to a stakeholder who wasn’t involved in the decision and may not have knowledge of insolvency processes.
- Some of the SIP 16 statements reviewed simply disclosed the valuations obtained for the business and assets. A full explanation needs to be provided which sets out the basis of the valuation undertaken by the agents. It also needs to be very clear what the valuations were and what consideration was achieved. These figures should be split between fixed and floating charges, if relevant, and should be easily comparable for the person reading the statement. Additionally, SIP 16 requires that where goodwill has been valued, an explanation and basis for the value given should be provided, which is a key disclosure that appears to be commonly missed.
- The marketing undertaken needs to be justified and the reasons underpinning the marketing and media strategy used should be clearly set out. It is not sufficient to simply list the marketing that was undertaken. To aid in the explanation, it can be helpful to reference the marketing essentials. Clearly if there has been a deviation from the marketing essentials, the Administrator should draw this to the creditors’ attention, explaining the reasons why, the reasons why they relied upon the marketing conducted and an explanation as to how a different strategy has delivered the best outcome.
- A viability statement is a useful tool which might result in enhanced stakeholder confidence. It’s important to make the purchaser aware of this and, even if they decline to provide one, it’s helpful to confirm in the SIP 16 statement that you made the purchaser aware of this option.
- The Administrator should seek any requisite approval of the proposals as soon as practicable after appointment and, ideally, the proposals should be sent with the notification of the sale. However, as required by SIP 16, if there has been any delay in issuing the proposals the Administrator should include an explanation for the delay in their Proposals, to avoid any confusion on the part of the creditor. This is especially important when the sale has taken place sometime before.
- Finally, it is key to ensure that all the reasons why the pre-pack sale was the best option, and that the sale achieved the best available outcome for creditors as a whole in all the circumstances, are clear and fully disclosed.
It seems obvious, but when you have been involved in the detail of the transaction, it is very easy to forget that stakeholders reading your SIP 16 disclosure don’t have the same in-depth background knowledge, and potentially insolvency knowledge. To help improve confidence in the pre-pack sale undertaken, it is essential to ensure that the SIP 16 statement is drafted with this in mind to ensure that the statement is as transparent and helpful as possible.
Note: ICAEW’s QAD insolvency team has been reviewing SIP 16 submissions since 1 October 2015, latterly with SIP 16s selected for review on a risk-based approach. Moving forward, QAD will be reviewing SIP 16 submissions periodically on a thematic rather than a routine basis. IPs shouldn’t therefore assume that if they haven’t heard from QAD about their submission, that it’s been reviewed and has been accepted as being fully compliant. IPs can help ensure compliance by reviewing their disclosures against the SIP to make sure that they have covered all the relevant requirements.
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