Vol 6 (2009) - Issue 2

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SIP 16 Delivers Guidelines on Best Practice for Pre-pack Administration Sales

The New Year has seen action by the Joint Insolvency Committee (JIC) and Association of Business Recovery Professionals in the UK to bring greater transparency to the so-called ‘pre-pack’ deals that have become such a regular feature of the insolvency and mergers and acquisition markets over recent months. The Insolvency Practitioners Association and the Government’s Insolvency Service have both welcomed the move, which has resulted in the issuing of SIP 16 (Statement of Insolvency Practice 16), setting out a code of practice governing the activities of all licensed Insolvency Practitioners (IPs) in the UK.

The introduction of SIP 16 is particularly timely in view of the increase in the number of businesses experiencing difficulties in the current economic climate.

The main disclosure requirements of the Guidelines call for practitioners to keep detailed records of their reasoning behind facilitating a pre-packaged sale and to justify why they considered such a sale appropriate. They should make it clear that their role is to advise the company as an entity and not individuals within it – encouraging directors to take independent advice – and must also be able to demonstrate that they have acted in the best interests of the company’s creditors as a whole and have avoided unnecessarily harming them.

Further, SIP 16 identifies a series of no less than 17 key pieces of information that the administrator should disclose to creditors at the earliest possible opportunity. In most cases, this means with their notice of appointment rather than as part of their report and proposals, which historically has been towards the end of the allowable eight-week period after the company has entered administration.

In particular, this information should include details of marketing activities undertaken by the company and/or the administrator to attract possible buyers, valuations received, rival bidders, alternative courses of action considered, the price paid for the business and the identity of the purchaser and any connections that the new directors have with the former company.

In the past, pre-pack deals have received a mixed reception. Advocates have insisted that they often offer the only option to sell a business in trouble as a going concern and preserve the jobs of those working in the failed business, whilst detractors argue that not enough effort has gone into marketing the failing business and therefore its best value has not necessarily been recognised, leaving unsecured creditors out of pocket.

In reality, the true position probably lies somewhere between these two poles; historically pre-packs have preserved more jobs than post appointment business sales (i.e., a going concern sale of the business negotiated and completed after the commencement of the insolvency procedure). But, on the other hand, the average return to unsecured creditors in pre-packs is on average slightly less than those from a successful sale of business sale post administration.

Nevertheless, the fact remains that whilst they may be perceived as unpopular from a creditor’s point of view, pre-packs are most appropriate when the principal assets of a business are the employees, forward contracts or intellectual property, as in all service businesses. Once word of a company’s financial difficulty gets out, it becomes much harder for IPs to retain the staff, suppliers and customers necessary to maintain value in the business. Suppliers and customers will be tempted to take their business elsewhere, leaving the company with few assets and, effectively, no business. Therefore, pre-packs are a tool to bring about the sale of a business which may have otherwise ultimately have to shut down following the appointment of administrators.

In an effort to review the position surrounding pre-packs, the Association of Business Recovery Professionals (R3) recently commissioned detailed independent research into their effectiveness. This study will be published in full in May 2009 but initial findings reinforce the arguments in favour of pre-packs. It found that over 90% of pre-packs resulted in the whole of a company’s workforce retaining their jobs as opposed to around 60% in other types of insolvent business sales. The study also highlighted that the average return to secured creditors in a pre-pack administration sale scenario was 14% higher than in other types of insolvent business sales. In fact, the outcome for unsecured creditors is, in real terms, almost identical but unfortunately they seldom see a recovery above 1 or 2% of their debts once a company enters the administration process.