Unfortunately for creditors, involvement in insolvency transactions may only serve to put them in a worse position as time and publicity erode value, writes Graham Lane of Willkie Farr & Gallagher (UK) LLP.
| Graham Lane |
partner, Willkie Farr & Gallagher (UK) LLP
In recent years, pre-packaged sales in UK administrations (“pre-packs”) have attracted a good deal of public and political attention, notably culminating in the “Graham Review into Pre pack Administration” (the “Graham Review”) conducted by Teresa Graham CBE published in June 2014, and the newly revised Statement of Insolvency Practice 16 (“SIP 16”) effective from 1 November 2015.
Pre-packs frequently cause controversy, principally because of a perceived lack of transparency, particularly in circumstances where the purchaser is connected to the seller. A pre-pack involves the sale of the business/assets of a company on “day one” of the administration process with the marketing and valuation process front-loaded ahead of appointment to minimise insolvency stigma and thus maximise value. However, necessarily, details of the sale are only published following its completion. The resulting absence of up-front information has prompted some creditors to be concerned that they are not getting maximum value from “secret” insolvent business/asset disposals.
Unfortunately, there is no easy answer to these types of issues. Whilst creditors want to be more involved in insolvency transactions, their very involvement may only serve to put them in a worse position because time and publicity can quickly erode value in distressed situations.
The Graham Review recognised that pre-packs have a place in “the UK insolvency landscape”, but recommended that changes be made to SIP 16 (which forms part of the professional guidelines that insolvency practitioners should follow when carrying out their duties) in an effort to restore creditor confidence.
The revised SIP 16 gives effect to a number of confidence building reform proposals. In brief, these include:
The Pre-Pack Pool – the revised SIP 16 requires insolvency practitioners to inform connected party purchasers of their ability to approach, on a voluntary basis, the “Pre-Pack Pool” (the “Pool”). The Pool consists of a panel of business experts, who can be approached by insolvency practitioners in order to obtain their opinion as to the reasonableness of the proposed transaction.
Details of the proposed sale are to be provided to the Pool via its website and, subject to timely payment of an £800 fee, Pool members will return their reasonableness opinion within two business days. Comprehensive guidance and information is available on the Pool’s website.
Market participants will no doubt be keen to see how the Pool will operate in practice, particularly in light of the following features:
• the Pool member will not give reasons for his/her opinion, there will be no appeal process, and there are no guidelines as to what will constitute a “reasonable” pre-pack. In addition, a Pool member will not necessarily have relevant industry sector experience for the proposed transaction which they are assigned to evaluate;
• the two business day turnaround time may appear swift, but as many will know, pre-packs are often negotiated right up to completion against the backdrop of a business in free-fall and with directors concerned about their personal liability for continuing to trade pending a sale. As such, timing concerns will likely arise, notably as to whether the Pool can meet the two business day timescale in practice and at what point it is appropriate for a purchaser to make the application; and
• the Pool is not a judicial body and its opinion is not binding. However, we may start to wonder whether purchasers and insolvency practitioners will complete deals in circumstances where the Pool’s opinion is that the sale is unreasonable. Will we start to see sales being made conditional upon the Pool issuing a favourable opinion? If so, we must query whether the risk of a “no sale” scenario as a result of the Pool’s existence will be more detrimental to creditors than a sale which has not been independently evaluated.
Valuation and marketing guidelines – there are some revised valuation guidelines and “marketing essentials” which apply to all pre-packs. The revisions include a provision that valuations should be carried out by independent valuers or advisors with sufficient professional indemnity cover. The marketing essentials set out a number of key principles to which the marketing exercise should conform. This includes placing emphasis on the insolvency practitioner explaining the particular marketing strategy to creditors and justifying (in a “comply or explain” manner) why any deviation from the essentials was appropriate. The effect of these new valuation and marketing guidelines may be limited in practice, as most IPs should have been complying with these principles as a matter of best practice in any event.
Enhanced disclosure – SIP 16 has always required that insolvency practitioners disclose details of the sale to creditors reasonably promptly after completion. However, the scope of information required to be disclosed has been enhanced with a view to ensuring that creditors are better informed about key transaction particulars. It will be interesting to see what certain organised unsecured creditor groups (e.g. Her Majesty’s Revenue and Customs for tax liabilities and the Pensions Regulator / the Pension Protection Fund for defined benefit pension scheme liabilities) will do with the additional information that will be made available and whether the new SIP 16 will, in practice, prompt more active scrutiny of insolvency practitioners, and potential ensuing litigation, arising from pre-packs.
Posted on 28th January 2016 by Fred Crawley
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