For both politicians and the media, pre-packaged sales of businesses out of administration (or “pre-packs”) are often highly controversial, particularly when the sales are back to the directors or management of the failed enterprise. There is a perception that pre-packs are often abused by unscrupulous directors to simply “dump debts” and start afresh free of troublesome liabilities, and all for far less than the true value of the business.
It’s certainly true that the internet contains plenty of websites of so-called “insolvency advisers” and “restructuring experts” promoting pre-packs in that way.
Used properly and appropriately, pre-packs can be a quick, reliable and relatively low-cost way of preserving a business. It avoids the risks and costs of trading in administration whilst attempts are made to market the business, and often there are no funds to trade. Meanwhile, talented employees jump ship, and the value of the business may diminish. There may also be other factors, such as regulatory issues, which mean trading is not feasible.
There is a raft of protection for unsecured creditors, who are the class most likely to be aggrieved at what they often believe to be a legal fraud. Clearly it is key to ensure that there is as much transparency as possible, and that creditors know and understand what’s happened. For that reason, in January 2009 the professional bodies, with the active “encouragement” of government (or, put another way, with a government gun at their heads), published Statement of Insolvency Practice 16 (SIP 16) which set out a framework for the provision of information to creditors. The Department of Business has diligently monitored compliance with the SIP and has not been slow to refer instances of non-compliance to the professional bodies for regulatory action.
SIP16 has now been updated and the revised version comes into effect on 1 November. The main changes are:
• A detailed narrative and explanation of the sale is to be provided to creditors within a maximum of 7 days (previously 14 days) of the transaction. It should be included in his formal proposals which are filed at Companies House. The administrator should obtain creditors’ approval of the proposals as soon as practicable.
• The information to be provided about valuations has been beefed up, and there is a requirement that the consideration should be shown split between asset categories, and between fixed and floating charge assets.
• Details of any previous insolvency sales of the business in the preceding (at least) 24 months must be disclosed, along with information about any previous involvement of the administrator or his firm.
• Any information necessary to ensure a transparent explanation of the transaction where there has been a group transaction.
All in all, we feel that anything that enhances transparency in a sensible way must be beneficial. A pre-pack will almost inevitably be a bone of contention with creditors who feel that they’re on the wrong end of a raw deal, and we welcome all attempts to dilute any misgivings.
At tri group (formerly Burton Sweet Corporate Recovery) we are always willing to discuss pre-packs and whether they may be appropriate in any given situation. Please call us if you would like a free, no obligation discussion. Meanwhile, if you would like more information about the new disclosure requirements, please get in touch.