Changes to Pre-Packs in Administration
Pre-pack sales have been criticised by creditors, due to concerns that in the majority of cases, the sales had been agreed prior to the first notification to creditors, and that the sales were often made to connected parties.
This meant that by the time the creditors received the first report from the Administrator, they were presented with the sale as a done deal, and thus had no opportunity to raise any queries or concerns. This also opened up the risk that a phoenix company was being formed.
In June 2014, the Insolvency Service published a review carried out by Teresa Graham CBE (“the Graham Review”) in which one of the key recommendations was that a pool of independent business people was set up in order to assess and give an opinion upon a proposed pre-pack sale to a connected person. This recommendation, as well as others made within the Graham Review, has been adopted, so now creditors will have some security that any proposed deal has been independently reviewed. The pool aim to provide an opinion on each deal within 48 hours, so any disruption to a pre-pack sale is intended to be minimal. The central idea behind the pool is that the deal is presented to an independent body and an explanation given as to why such a deal is the best way to proceed.
The requirement to approach the pool only applies to purchasers who are deemed to be a connected party. A “connected party” can be a director, shadow director or owner of the insolvent company, or an associate of these parties who then becomes the director, shadow director or owner of the new company. Essentially there is a link between the controllers of the first company and the controllers of the second company. A connected party in this context only, does not include lenders with security by way of voting rights with more than one third of the shares of both the old company and the new company.
The connected party who intends to the purchase the business will be responsible for reporting to the pool, and will be required to provide a copy of the pool’s opinion to the Administrator, who will in turn attach it to the SIP 16 report which is then sent to creditors. This report would state whether the pool was consulted, whether the opinion was disregarded, or whether the pool was not consulted at all. However there is an issue in that the purchaser of a business may not necessarily know that he has to approach the pool, therefore we recommend to all insolvency practitioners that they advise any potential purchaser in writing of their obligations.
Despite receiving a negative statement from the pool, a deal can still proceed. However, insolvency practitioners would be strongly advised to set out their reasons for doing so within their SIP 16 report.
The changes to SIP 16 tend to follow a ‘comply or explain’ approach. They include the requirement for a viability statement covering a period of 12 months should also be prepared in respect of the business. Furthermore, insolvency practitioners are required to carry out more transparent marketing of the business prior to the sale.
The specific provisions within the Small Business, Enterprise and Employment Act 2015 are quite vague as it just allows regulations to be enacted which cover the sale or disposal of a company to a connected person. This leaves potential for more stringent reforms to be introduced should this be deemed necessary.