SIP 16 and Pre-Packs
Marcia Shekerdemian
Statement of Insolvency Practice ("SIP") 16 came into force on 1st January 2009. As a consequence, administrators now have to make extensive written disclosure to creditors "in all cases where there is a pre-packaged sale".
This comes as no surprise against the backdrop of economic meltdown and the plethora of high-profile retail failures - several of which resulted in pre-pack sales (eg. Whittards, The Officers' Club, USC and, more recently, Waterford Glass). Is it any wonder that creditors and indeed the public have come to view - with increasing cynicism and suspicion - what have been described as "revolving door administrations", or "cosy" arrangements between accountants and those who may or may not have been directly responsible for a business' collapse?
Those of us old and tired enough to recall the last recession will remember the heady days of what we now realise were the first "pre-packs" - although we didn't call them that then. In those days, it was all a bit of a song and dance. Typically, the lawyers and IPs would work frantically for a few days putting together the sale agreement and administration petition (as it was known in those days). We would then rush off to the judge and apply for an administration order and, simultaneously, for an order giving the administrator permission to sell the business, as often as not to members of the existing management team.
In those days, the prevailing view (notwithstanding certain dicta to the contrary, see the analysis of the earlier authorities in re T & D Industries Plc [2000] 1 WLR 646) was that permission was needed if the administrators wished to sell prior to the Section 24 creditors' meeting (see re Consumer & Industrial Press Ltd (1988) 4 BCC 72, re Smallman Construction Ltd [1989] BCLC 420, re Montin Ltd [1999] 1 BCLC 663, re Osmosis Group Ltd (unrep. 25.5.1999)).
Then, the court's approval was much more than simply an exercise in rubber-stamping. Inevitably, the proposed sale would be the subject of significant judicial scrutiny and the judge would expect, at the very least, to have serious valuation evidence as well as pretty compelling evidence that any delay in the sale process would simply destroy any residual going concern value that the business might have. The grant of permission would not, of course, in any way immunise the administrator from any subsequent challenge from creditors, but it would provide a measure of comfort and reassurance.
Writing as someone who regularly darkened the doors of the Applications Court on permission to sell applications, Neuberger J's judgment in re T & D Industries Plc [2000] 1 WLR 646, came as something of a body blow. Permission was no longer needed! Even more shocking, we were told that apparently, "commercial and administrative decisions are for [the administrator], and the court is not there to act as a sort of bomb shelter for him".
The introduction of Schedule B1 of the Insolvency Act 1986 by the Enterprise Act 2002 removed any residual doubts over the ambit of an administrator's power to sell in advance of the creditors' approval of his proposals. Permission was not needed (re Transbus International Ltd [2004] 1 WLR 2654). Indeed, the pre-pack procedure even survived a challenge from HMRC in re DKLL Solicitors [2007] BCC 908, in which the Judge held that the majority creditor did not have a de facto power of veto.
High and low level rumblings outside the industry increased in the second half of 2008, resulting in SIP 16. Whilst this SIP describes itself as "one of a series of guidance notes", no one should be lulled into a false sense of security. Its purpose (as with the other SIPS) is to set out "basic principles and essential procedures with which [IPs] are expected to comply. Departure from the standard(s) set out in the SIP(s) is a matter that may be considered by a practitioner's regulatory authority for the purposes of possible disciplinary or regulatory action".
So what does it say and what - if anything - does it change? Much of it simply sets out what ought to be obvious or what, in an ideal world, should have been done anyway.
According to paragraphs 1 to 3:
- practitioners should bear in mind the duties which they, and those who act on their advice, owe to parties who might be affected by the arrangement
- practitioners should "keep a detailed record of the reasoning behind the decision to undertake a [pre-pack] and should be able to explain and justify why such a course of action was considered appropriate"
- the fact that administrators have power to sell without permission will not protect them from challenges to their conduct under paragraph 74 (relief for unfair harm) or paragraph 75 (misfeasance) of schedule B1.
- Under the heading "Preparatory Work" (paragraphs 4 to 7), practitioners are told:
- that they need to be clear about the nature and extent of their role and their relationship with the directors in the pre-appointment period
- that they are not there to advise the directors, who should be encouraged to take independent legal advice, especially if they are acquiring any of the assets
- that they should bear in mind the duties that they owe creditors in the pre-appointment period
- that in considering whether or not to sell and the manner of disposal, administrators must bear in mind the requirements of paragraphs 3(2) and 3(4) of Schedule B1 which (amongst other things) require them to perform their functions in the interests of the company's creditors' as a whole and should be able to demonstrate that they have done so.
The SIP gets down to business under the third and final heading "Disclosure" (paragraphs 8 to 11). The preamble (paragraph 8) tells us that "It is in the nature of a pre-packaged sale in an administration that creditors are not given the opportunity to consider the sale...before it takes place. It is important, therefore, that they are provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, so that they can be satisfied that the administrator has acted with due regard to their interests."
Paragraph 9 then lists information (17 items) to be disclosed to all creditors in all cases where there is a pre-packaged sale:
- the source of the administrator's initial introduction
- the extent of his involvement prior to the appointment
- any marketing activities
- any valuations
- any alternative courses of action considered
- why it was not possible to market the business as a going concern and sell it in the administration
- what efforts were made to consult with major creditors
- the identity of the purchaser
- any connection between the purchaser and the directors or shareholders
- the names of any directors or former directors who are involved in the management or ownership of the purchaser.
- details of the assets involved and the nature of the transaction
- the date of the transaction
- if the sale is part of a wider transaction, a description of other aspects of the transaction
- the consideration for the transaction and payment terms (including any conditions that could materially affect the consideration)
- any options, buy-back arrangements or similar conditions in the contract of sale
- details of requests made to potential funders for working capital
- details of any guarantees given by any of the directors to any prior financier and whether that financier is financing the new business.
Paragraph 10 stresses that this information should be provided in all cases unless there are "exceptional circumstances" (emphasis supplied), in which case an explanation of those circumstances must be given. In cases where there has been a sale to a connected party "it is unlikely that considerations of commercial confidentiality would outweigh" the need for disclosure.
Under paragraph 11, "unless it is impracticable to do so", the disclosure should be provided in the first notification to creditors and in any case where there has been a pre-pack, the administrator should hold his initial creditors' meeting as quickly as possible. If there is to be no initial meeting and it is impracticable to provide this information in the first notification, then it should be provided in the statement of proposals, which should go out as quickly as possible.
Many of the matters which now have to be disclosed will have been considered by the administrators in the ordinary course of events. So it could be said "well what's all the fuss about? All we have to do now is write it down!"
In practice, however, this will all add significantly to the administrators' administrative burden, not to mention the actual expense of the administration itself. At the preparatory stage, discussions and meetings will have to be carefully minuted. Subsequently, the terms and consequences of the disclosure will need carefully to be considered. Simply ticking 17 boxes and providing the bare minimum could well lead to protracted questioning (and arouse suspicion), but equally there is such a thing as too much disclosure - and this could be just as problematic.
Plainly, there can be no hard and fast rule about what to say and what not to say. Common sense would suggest more, rather than less. Moreover, unless there is a good (indeed "exceptional") reason not to, I would suggest appending the valuation to the report and making it clear that copies of the sale agreement will be available upon request.
Of course the real problems are likely to arise after the disclosure has been given. In all but the most straightforward cases further questions are going to be inevitable. These will have to be dealt with, rather than fielded. Most practitioners should be able to take this in their stride - but there may well come a point at which the questions go beyond the scope of the sort of disclosure contemplated by SIP 16. At this stage, the IP may have to make the most uncomfortable choice of all - to go to lawyers.
At least in the short term, the economic and political climate is likely to result in careful policing of the industry, to ensure proper compliance with the new SIP. Indeed, we have been promised (or some may say threatened with) close scrutiny. It was recently reported that Graham Horne (deputy chief executive of the Insolvency Service) told a Parliamentary hearing "We are going to get every statement into our office and see if the administrator has followed the spirit [of the law governing pre-packs]" and that compliance with SIP 16 will be "actively policed" and will be "prioritised".
For my part, I don't consider that the introduction of SIP 16 will generate any marked increase in complaints or other proceedings against IPs. It is still fairly difficult to persuade a court that an administrator who has been exercising his professional skill and commercial judgement has actually done anything wrong - after all, the decision to go for a pre-pack is of professional experience and expertise.
In this regard the recent observations of Blackburne J in re Lehman Brothers International (Europe) [2008] EWCH 2869 should be of some comfort to IPs. Dismissing an "unfair harm" application against the administrators, he held that "where...there is no suggestion that the administrator is acting improperly, it would, in my judgement, run flat contrary to the nature and purpose of an administration if the court were to interfere in the detailed day to day management of the administration" and that "absent any plainly wrongful conduct from the administrator the court would be loathe to interfere" (emphasis supplied).
But don't relax just yet - more change may be on the way. Further reforms to the pre-pack procedure were due to be considered at the end of January, the Business and Enterprise Regulatory Reform Committee having launched an investigation into the use of the pre-pack procedure. Watch this space...
January 2009