Pre-Pack Sales - A New Standard

Published byGraham Bell

11th December 2015

In late November 2015, the Statement of Insolvency Practice for pre-packaged sales in Administrations (called "SIP16") was updated.

Directors, shareholders and others connected with an insolvent company can now have their acquisition of its business through a ‘pre-pack’ sale reviewed by an independent ‘pool’ of experts – in a move to improve transparency in UK business rescue. 

Announcing the update, Anna Soubry, Minister for Small Business, Industry and Enterprise, said that:

“Business rescue is an important part of our entrepreneurial culture and anything that brings clarity, transparency and trust for creditors is to be welcomed. These measures, including the pre-pack pool, are a significant step towards increasing creditor confidence in pre-packs, particularly involving sales to connected parties.”

She continued that “The economic benefits of pre-packs, including saving jobs, are widely acknowledged and the fact that these reforms have the support of trade bodies, industry groups, regulators and creditor groups, shows that it is possible to balance increasing trust in the pre-pack process with giving businesses a second chance.”

Pre-pack Pool explained 

The connected party will make an application to the Pre-pack Pool via a secure, online portal. 

Based on the information submitted, an independent Pre-pack Pool reviewer will issue one of three opinions: 

1. The pre-pack is not unreasonable
2. The case for a pre-pack is not unreasonable but there are minor limitations in the evidence provided
3. The case for pre-pack is not made

The Pre-pack Pool works on a user-pays principle. The process will cost £800 + VAT per application.

The Pool's opinion will be provided to creditors once the business sale has been completed. 

Duties of the Administrator

The Administrator should provide creditors with sufficient information ("the SIP 16 statement") such that a reasonable and informed third party would conclude that the pre-packaged sale was appropriate and that the administrator has acted with due regard for the creditors’ interests. In a connected party transaction, the level of detail may need to be greater. 

The insolvency practitioner should ensure that any connected party considering a pre-packaged purchase is aware of their ability to approach the Pre-pack Pool and the potential for enhanced stakeholder confidence from the connected party approaching the Pre-pack Pool and preparing a viability statement for the purchasing entity.

Connected Party transactions only

Where the sale has been undertaken to a connected party, additional details should be included in the SIP16 statement. 

The Administrator should include one of the following in the SIP16 statement – 

• a statement that the Pre-pack Pool has been approached by the connected party, or not;
• a statement that the Administrator has requested a copy of the opinion given by the Pool member.

If an opinion is made by the Pre–pack Pool and is provided by the connected party to the Administrator, a copy of that opinion is to be included within the SIP16 statement, clearly stating the date of that opinion. 

Viability statement in connected party transactions 

A viability review can be drawn up by a connected party wishing to make a pre-packaged purchase, stating how the purchasing entity will survive for at least 12 months from the date of the proposed purchase. The connected party should consider providing a short narrative detailing what the purchasing entity will do differently in order that the business will not fail (“the viability statement"). 

The Administrator should request that the connected party considering a pre-packaged purchase provide a copy of their viability statement: 

• If it is then provided, it should be attached to the SIP16 statement.
• If the viability statement has been requested but not provided, the Administrator should notify creditors of this in the SIP16 statement.

Overview and comment

Where a business is pre-packed to a third party, independent of the directors and possibly even secured creditors, then it will still be a very powerful and rapid tool. 

However, the pre-pack to a connected party has always been a difficult "sell" to creditors. 

The process envisaged in SIP16 outlines a justification process to make that "sell" easier. It may look tough but it’s hard to view it as unfair. When a business becomes insolvent, there is a ripple effect for all stakeholders (including creditors, suppliers, customers, employees and the wider community where less money will be spent if employees are out of work). This is one argument in favour of pre-packs but the damage can be even deeper if version 2 of the business then also fails.

Further, a recurring theme in version 2 of the business when parties connected to the first version of the business are still involved, is that there is less capital available, because of the amount lost in the first version of the business.       

So giving thought to what version 2 of the business will do differently in order that the business will not fail (ie. preparing the viability statement) is exactly the right discipline to recommend.