You may recall we wrote to you back in February 2014 with the state of play at that time. Since then, there has been further detailed consideration of Pre-Packs, culminating in the so called “Graham Review” instigated by the Government.
By way of a brief reminder, a Pre-Pack refers to an arrangement under which a sale of all or part of a company’s business and assets is negotiated with a purchaser prior to the appointment of an Administrator, and the Administrator effects the sale immediately on, or very shortly after, his appointment.
We consider that Pre-Packs are a valuable rescue mechanism in the right circumstances but they have come in for a great deal of criticism recently, in particular when the sale is to a connected party eg management.
As a consequence, the Graham Review came up with a number of recommendations which form part of a new Statement of Insolvency Practice 16 (“SIP16”), a copy of which is attached. This now forms the best practice for our profession, and it would be a bold (perhaps foolish) Insolvency Practitioner who ignores it in its entirety. Businesses
The two key changes to previous practice, which particularly affect sales to connected parties, are the use of the Pre-Pack Pool and Marketing Essentials.
Pre Pack Pool (“Pool”)
The prospective purchaser, where a connected party is involved, may make an application to the Pool via a secure, online portal. Based on the information submitted, the independent Pool reviewer will issue one of three opinions:
- The pre-pack is not unreasonable
- The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided
- Case for pre-pack has not been made out
The Pool, operated by Pre-pack Pool Limited, works on a user-pays principle. The process will cost £800 plus VAT per application.
Insolvency practitioners will need to make sure that connected parties considering acquiring a company’s business or assets through a pre-pack purchase are aware of their ability to approach the Pool. The process is aimed to encourage applicants to agree to the opinion being sent to the Administrator or intended Administrator automatically.
The website at www.prepackpool.co.uk includes a number of anticipated questions and answers about the operation of the Pool.
The Administrator should disclose in his SIP16 report to creditors which must be issued within 7 days of completion of the sale whether the Pool was approached by the connected party, or not. If it was approached then a copy of the opinion of the Pool should also be included in the SIP 16 report.
The prospective Administrator should also request that the connected party conduct a viability review and prepare a viability statement. The Administrator should disclose the statement in his SIP16 report or state that it has not been obtained, as applicable. Again, the connected party is not obliged to conduct a viability review.
It remains to be seen how many connected parties make an application to the Pre-Pack Pool and/or prepare a viability statement. And it isn’t clear what the effect of a connected party (i) not making an application and/or (ii) being given a ‘no’ but wishing to carry on regardless. The purpose behind it is clearly an attempt to improve stakeholder confidence in the process but it is voluntary, so it will be interesting to see the reaction of connected parties when told about it.
SIP 16 now sets out a list of ‘marketing essentials’ in its Appendix, which the Administrator is obliged to consider. These ‘marketing essentials’ are:
- Broadcast – to make the business’ availability known to the widest group of potential purchasers
- Justify the marketing strategy – to explain to creditors what the reasons are for the marketing and media strategy used
- Independence – the Administrator should be satisfied of the adequacy and independence of any marketing, particularly where the business has been marketed prior to his/her appointment
- Publicise rather than simply publish – marketing should be for an appropriate length of time and creditors provided with reasoning for the length chosen
- Connectivity – include online marketing and media by default, or justify if not used, and
- Comply or explain – particularly where sales are to connected parties, an explanation should be provided as to how the marketing achieved the best outcome for creditors as a whole.
The marketing essentials aim to answer critics of the Pre-Pack process who have made the point that a lack of proper marketing and explanation to creditors of the steps taken prior to a Pre-Pack being completed meant that creditors were often unable to determine if the best deal had been done.
However, there will be occasions where for reasons of time and/or confidentiality, it will be difficult to market a business widely or even at all and therefore there will be times when the new marketing essentials may be difficult to achieve.
Only time will tell whether these new principles make any difference but what is clear is the threat from Government of the possibility of introducing a mandatory requirement to conform if this voluntary scheme is widely ignored. How a mandatory scheme might work is another question altogether!
Notwithstanding the changes above, KRE believe that Pre-Packs will continue to offer a valuable rescue mechanism and each will be viewed by us on its merits as has always been the case but it is even more important than ever that management takes early advice on the best course of action to ensure that if a Pre-Pack is being contemplated, sufficient time is available to consider the new protocols and requirements.