Pre-Packs And The "New And Improved" SIP 16

A new Statement of Insolvency Practice 16 ("SIP 16") relating to pre-packaged sales in administration ("Pre-Packs") came into force on 1 November 2013. The changes primarily relate to the increased disclosure obligations that an Insolvency Practitioner ("IP")/Administrator must make to creditors of the underlying company and aim: (i) to promote transparency when dealing with an IP/Administrator throughout the pre-packaged sale process; (ii) to ensure (as far as possible) that fair value is obtained for assets sold; and (iii) to ensure that all creditors and other stakeholders of the business are confident that the IP/Administrator has acted professionally and objectively. SIP 16 requires that all communications from an IP/Administrator to creditors should aim to be clear, full and timely and, in addition, explain what has happened to the assets of the company.

What are Pre-Packs and SIP 16?

• Pre-Packs

• A"Pre-Pack" or "Pre-Packaged Sale" is a restructuring tool used in the United Kingdom and is defined in case law (see T&D Industries Plc [2011] 1 WLR 646; Transbus International Ltd [2004] EWHC 932 (Ch), [2004] All ER 911; DKLL Solicitors [2007] EWHC 2067 (Ch)) as: "an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or shortly after, his/her appointment".

• SIP 16

• SIP 16 is a statement of key rules, basic principles and essential procedures with which an IP/Administrator in a Pre-Pack should comply.
• Although SIP 16 is helpful in addressing creditors' interests as a whole, it does not have legal authority. Failure to comply may simply result in (i) regulatory and disciplinary action; (ii) fines; and/or (iii) may be taken into account by the courts when challenging and IP/Administrator's authority under Schedule B1 to the Insolvency Act 1986 (the "Insolvency Act") (see paras. 74 and 75).

Certain Key Changes

In the Name of Transparency: The Explanatory Statement

• IP/Administrators must provide creditors with an Explanatory Statement which includes:
  • a detailed explanation and justification of the Pre-Pack sale. The explanation should include a statement as to how the transaction/sale meets the statutory purpose set out in the Insolvency Act (which includes acting in the best interests of creditors as a whole and not just secured creditors);
  • confirmation that the sale price presents the best price that could be reasonably obtained in the circumstances; and
  • the information set out in the New Annex to SIP 16 unless there are exceptional circumstances (i.e. if such disclosure could prejudice the company or value of its assets). In such circumstances an IP/Administrator should explain in the Explanatory Statement why it has not complied with the relevant disclosure requirements.

The Explanatory Statement must be filed with Companies House as part of the Administrator's statement of proposals (i.e. a statement of their proposals for achieving the purposes of administration) within 8 weeks of the date of administration.

(B) Disclosure Requirements: The New Annex

The New Annex to SIP 16 sets out in detail the information that needs to be disclosed to creditors. This includes (among other things) the following:

• details of the source and date of the appointment of the IP/Administrator;
• the extent of the IP/Administrator's involvement in the sale process prior to their appointment as Administrator;
• the outcome of marketing activities conducted by the company and an explanation if no marketing activities were undertaken;
• details of valuations that were obtained, including who provided the valuations and how the valuations compare with the actual sale price;
• the date of the transaction;
• details of any registered charges;
• whether efforts were made to consult with major creditors;
• details of the sale consideration, broken down under valuation categories and split between fixed and floating charge realisations;
• if the sale is part of a wider transaction, a description of the other aspects of the transaction; and
• the identity of the purchaser and whether any former directors of the company are involved in the management or ownership of the purchaser.

(C) When to Inform Creditors?

• A SIP 16 Statement (which comprises the Explanatory Statement and the disclosable information set out in the New Annex) should be provided with the first notification to creditors and in any event within 7 calendar days from the pre-packaged sale. If this is not possible, a reasonable explanation for the delay will need to be provided.

Conclusion: Issues Remain

While the introduction of SIP16 is helpful to creditors as a whole, various issues remain and will continue to attract criticism, especially from junior "out of the money" creditors and unsecured creditors. However, it remains to be seen whether further structure or legislative changes will be called for following the Government's review of the Pre-Pack regime, which is currently being undertaken by the Insolvency Service, with a report of recommendations due in spring 2014. The Insolvency Service's review will also consider: (i) the long-term impact of Pre-Pack transactions; (ii) whether they encourage growth and employment; (iii) whether they provide the best value for creditors as a whole; (iv) the usefulness of the Pre-Pack procedure in the context of business rescue generally in the United Kingdom; (v) whether Pre-Packs place unsecured creditors at a disadvantage; and (v) whether any of the practices associated with them are harmful.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.