Pre-Packaged Sales - Does SIP16 matter?
28 January 2009
It is well established that pre-packaged administration sales do not require approval of the courts or creditors. The speed at which these deals thus occur has often taken creditors (particularly trade creditors and suppliers) by surprise and have been the subject of some criticism.
In response to these and other concerns, the insolvency regulatory authorities, acting through the Joint Insolvency Committee, have produced a new practice statement in relation to pre-packaged sales and administrations which applies from 1 January 2009. This also needs to be read in conjunction with the JIC's new Insolvency Code of Ethics which come into force on the same date and, amongst other things, places a duty of objectivity on practitioners.
All pre-packs carried out after the Christmas trading period will need to comply with these new regulations and so certain retail pre-packs already completed this year will have been caught by this regime.
The practice statement reminds insolvency practitioners of the duties which they, and those who act on their advice, owe to parties who might be affected by a pre-packaged sale and introduces a new formally expressed requirement to disclose detailed information to creditors, including a justification of why a pre-packaged sale was undertaken.
Duties to creditors
Practice Statement 16 reminds practitioners that, although the courts have held that an administrator has power to sell assets without the prior approval of the creditors or the permission of the court, reliance on such authority does not protect administrators from potential challenges to their conduct under Paragraph 74, or claims for misfeasance under Paragraph 75, of Schedule B1 to the Insolvency Act 1986.
The statement focuses on an administrator's duties and obligations in the pre-appointment period and directs that practitioners should be clear about the nature and extent of their role and their relationship with directors. It highlights the importance of the directors seeking independent advice where the practitioner is advising the company, particularly if the directors may acquire an interest in the assets in the pre-packaged sale.
The statement also reminds practitioners that they should be mindful of the potential liability which may attach to any person (not just directors) who is party to a decision that causes the company to incur credit and who knows that there is no good reason to believe it will be repaid.
Much of this appears to be a gentle reminder to practitioners about the duties that they have always had in these situations.
New disclosure requirements
The practice statement however introduces new recording and disclosure requirements which apply to a pre-packaged sale. This may have been best practice previously, but has now been given formal status.
The statement requires practitioners to keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale and advises that practitioners should be able to explain and justify why such a course of action was considered appropriate.
The statement also includes an obligation on administrators to provide creditors with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that the creditors can be satisfied that the administrator has acted with due regard to their interest. Creditors may view this as a pyrrhic victory as, by the time they receive the report, the deal will have been done. They may also see little new information above that traditionally received in the administrator's statement of proposals, which has always required a statement about the reasons for, and terms of, any asset disposal. However, whilst some information has always been required to be provided to creditors, the statement highlights a number of matters which should be disclosed to creditors. These include the source of the administrator's initial introduction and extent of involvement prior to the appointment, any valuations obtained of the business or the underlying assets, the alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes and any connection between the purchaser and the directors, shareholders or secured creditors of the company. The administrator is also required to disclose whether efforts were made to consult with major creditors, although no justification for non-consultation is expressly required.
The statement directs that this information should be provided in all cases unless there are exceptional circumstances (and unless non-disclosure is permitted under the Insolvency Act 1986 because it would seriously prejudice the commercial interests of the company). It notes that if the sale is to a connected party, it is unlikely that considerations of commercial confidentiality would outweigh the need for creditors to be provided with this information.
The information should be provided with the first notification to creditors, unless it is impracticable to do so. The first notification is the notice of appointment, which is required to be sent as soon as is reasonably practicable. This is at a very early stage, and is usually earlier than this detailed information would have previously been made available. Otherwise the information should be provided in the statement of proposals of the administrator which should be sent out as soon as practicable after the administrators' appointment, but in any event within 8 weeks.
Pre-packages sales have historically been used in the retail sector where there is a need to sell the business without publicity to avoid a negative reaction from customers and staff, and where there is no party to fund the administration period to enable a more sophisticated rescue option to be pursued.
It will be interesting to see whether this new practice statement results in administrators being less willing to sell struggling businesses using a pre-pack or whether disgruntled unsecured creditors will use the more detailed information provided by the administrator following a pre-pack to question whether the administrator acted with due regard to their interests. However, early experience suggests that the impact of this SIP will be far more limited than issues of real commercial substance, particularly the availability of funding.
