Insolvency: greater transparency for creditors in pre-pack sales

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

Creditors can look forward to reforms to the procedure for pre-pack sales, which are due to be implemented on 1 November 2015.

A revised Statement of Insolvency Practice 16 (SIP 16) has been released by the Joint Insolvency Committee and will be best practice for IPs dealing with pre-pack administrations. The new SIP 16 places a greater focus on transparency and reassurance to creditors.

The key changes

• Marketing – SIP 16 contains a new marketing essentials guide setting out the marketing activities that the company in administration should undertake to ensure that the maximum consideration is achieved for the benefit of all creditors. An appropriate marketing strategy should be adopted and the marketing should be as wide as possible (including using online forums) and for an appropriate amount of time. Failure to comply with the marketing essentials guide will require the administrator to set out in detail the reasons for not doing so and explain why the marketing strategy adopted was still appropriate.
• Valuation – Any valuations of the company or assets should be carried out by an independent valuer and, if a valuation is relied upon, the reasons for doing so should be justified.
• Disclosure – The administrator must disclose to creditors all information relating to the pre-pack administration, both before the administrators' appointment through the whole transaction and to the subsequent sale. This should include details of:
• Connected parties – Where a sale is to a connected party (defined in ss. 249 and 435 of the Insolvency Act 1986), additional details should be included in the SIP 16 statement:
• Timing – It is recommended that the administrator's report to creditors is sent at the same time as the SIP 16 statement reducing the time for compliance to seven days.

From 1 November 2015, SIP 16 will be monitored by the Joint Insolvency Committee and all notifications should be sent to the particular administrators' regulatory authority.

SIP 16 is a voluntary code and it remains to be seen how it will be implemented in practice by insolvency practitioners. With more onerous obligations placed on pre-pack administrations it may well be that we will see a sharp decline in their use going forward.

The Government has made it clear that if the industry fails to adopt these measures new legislation will be implemented banning pre-pack sales to connected parties.

Please contact us if you would like more information about the changes.