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Pre-packaged Sales in Administrations: Statement of Insolvency Practice 16 ('SIP 16')
Philip Reynolds, Director, and Lee Manning, Partner, Restructuring Services, Deloitte LLP, London, UKOn 1 November 2015, the latest iteration of SIP 16 was issued in response to the findings of the government funded 2014 Graham Report into pre-packaged sales in administrations.
For those who are counting, this is the third version of the SIP since its debut in 2009, making it the second most amended SIP (after SIP 9 on IP fees) reflecting just how controversial this topic remains. As the Graham Report affirmed, pre-packaged sales can and do have a positive effect on the economy; but, whether they also deliver value or best outcome for creditors generally is not so clear.
Since their inception there has been conflict between the desirability of effecting a rapid, often discrete, sales process of a distressed business into new ownership, so as to minimise the risks and costs of the disruption caused by an insolvency, and the need to reassure creditors that they have not been disadvantaged by such a rapid process.
Further concern arises where the sale has been back to existing owners/managers as to whether the primary motive of the insolvency was simply to leave debt behind and the former owners starting afresh, having only to concern themselves with re building business relationships with those creditors they consider critical to the future operations of their NewCo.
Earlier iterations of SIP 16 set out to balance this conflict by prescribing what should be disclosed to creditors by the officeholder undertaking the pre-pack, covering the issues leading up to the insolvency and the steps taken by the IP to obtain the best value via the pre-pack. Seemingly this has not worked – creditor dissatisfaction with the process remains high – so will this latest SIP 16 do what its predecessors failed to do, and engender faith in the pre-pack sale as a valid recovery tool? If it doesn’t, could this eventually spell the end of pre-packs, particularly those involving sales back to owner/managers?
To answer the first of these questions we perhaps need to look back to 1966, a memorable year in many respects, not least in this context. This was the year in which the High Court decided that a 'legal loophole' exploited in Re Centrebind was valid and that a liquidator did have the power to dispose of a Company’s assets in the hiatus period between his appointment by the members and holding of the creditors’ meeting. This process, which became known as 'centre-binding', was of course the fore runner to the pre-packaged sale, with which we are now familiar.
It wasn’t long before this 'legal loophole' was being exploited to the fullest extent by a new breed of IPs who deliberately targeted owner managed businesses and offered them a way out of debt. The provider would review the business, find it to be insolvent, and recommend immediate action by the owners to place the company into liquidation (ostensibly to avoid trading whilst insolvent) and to be appointed by the shareholders as liquidator, following which the liquidator would sell back the business and assets of the Company to the owners, at whatever price was agreed, all before the creditors’ meeting, which would be called up to 14 days later.
Most of these cases were characterised by lack of information or explanation such that creditors had no means of assessing whether the sale had been for value or whether they had simply been short changed; suffice to say, there was also rarely any prospect of a return to creditors. It was not surprising, then, that 'centrebinding' attracted considerable negative publicity such that by 1981 Parliament was debating how to better control and deter abuse of this process.
Despite the tightened legislative framework of the Insolvency Act 1986 and regulation of the insolvency profession, the pre-packaged sale, now a feature of administrations rather than liquidations, continued to divide opinion, the biggest complaint being lack of transparency. In 1990, launching a new SIP (16) to tackle the issue by setting out minimum disclosure requirements, the Insolvency Service wrote, in an explanatory letter to Insolvency Practitioners.
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