Vol 10 (2013) - Issue 6

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SIP 16: Out with the Old and in with the New?

On 1 November 2013, an updated Statement of Insolvency Practice 16 (the 'New SIP 16') was issued by the Joint Insolvency Committee. This update overrides the Statement of Insolvency Practice 16 published in 2009 (the 'Old SIP 16') and the Old SIP 16 guidelines have now been withdrawn; although it should be noted that further change is anticipated, as set out below. SIP 16 sets out the guidelines which administrators in the UK ought to adhere to when conducting a pre-packaged sale i.e. a sale of a company’s business or assets on or immediately after the formal appointment of the office holder ('pre-packs').

The Old SIP 16 had been subject to criticisms such as the 'phoenix phenomenon' (the possibility that an insolvent company can effectively reform by selling the business or its assets to its original directors and/ or shareholders without any redress to its creditors); lack of transparency on consulting with creditors, valuation and the long term impact that it could have on the company.

It is questionable whether the New SIP 16 has addressed the above problems in full, as commentators believe that the New SIP 16 does not differ significantly from the Old SIP 16. The main theme for the changes is the issue of transparency throughout the pre-packaged sale process. The New SIP 16 attempts to tackle the transparency problem by providing greater clarity for creditors e.g. it requires administrators to provide earlier notification of the pre-pack and more detail on circumstances of the transaction.

A detailed analysis of changes in the relevant paragraphs and the appendix to SIP 16 are set out below.

Key changes
1. Statement of transaction
The administrator is now obligated to provide the creditors with a detailed statement and justification that the pre-pack sale process has taken the interest of the creditors into account and meets the statutory purpose set out in the Insolvency Act. The administrator also has to demonstrate that the sale price is the best price that can reasonably be achieved.

2. Seven day notification limit
The statement of transaction needs to be provided with the first notification to creditors and in any event within seven calendar days of the sale. The time limit in the Old SIP 16 was fourteen calendar days. The effect of this is that under the New SIP 16 the administrator must provide more information to the creditors, in less time. There is also a filing requirement at Companies House with the administrator’s Statement of Proposal.

3. Disclosure requirements
The information disclosure requirements are more substantial than previously, placing greater emphasis on the provision of information relating to valuation. The New SIP 16 appendix enhances the list of information to be provided to creditors currently listed at paragraph 9 of the Old SIP 16. The enhancements are as follows:

a. The source of the administrator’s initial introduction must now be by name and date.
b. Pre-appointment considerations must be disclosed to the extent of showing the administrator’s involvement prior to the appointment and whether efforts were made to consult with major creditors and the outcome of any such consultation.
c. Details of registered charges with dates of creation and details of previous sales of the business in (at least) the previous 24 months and disclosure of any involvement by the administrator or the administrator’s firm.
d. The outcome of any marketing activities conducted by the company or, where no marketing activities were undertaken, an explanation as to why this was the case.
e. A summary of the valuation methodology, together with detailed information about any valuers or advisors. Also, if no valuation has been obtained, the reason why there has not been a valuation together with an explanation as to how the administrators satisfied themselves on the value of the assets.