Pre-packaged sales in administrations

On 1 January 2009, Statement of Insolvency Practice 16 (“SIP16”) took effect. SIP16 is a guidance note issued to licensed insolvency practitioners (“Practitioners”) that sets out required practice for those engaged on pre-packaged sales.

A “pre-pack” is a sale of a company’s business and assets that is negotiated before an administrator is appointed with the intention that completion of the sale takes place immediately or shortly after such appointment.

Purpose of SIP16

SIP16 sets out principles and essential procedures which Practitioners are required to comply with. Failure to comply with SIP16 may be considered by the Practitioners’ regulatory authority for the purposes of disciplinary or regulatory action.

SIP16 Guidelines

Practitioners who are acting on a pre-packaged sale in an administration are required to:

– keep in mind the duties which they, and those who act on their advice, owe to parties who might be affected by the arrangement and have regard to the associated risks;

– keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale, and be able to explain and justify why such a course of action was deemed appropriate for that company;

– make it clear to the directors of the company that they have been appointed to advise the company and not the directors on their personal position;

– encourage the directors of the company to take independent advice, particularly if there is a possibility of the directors acquiring an interest in the assets in the sale; and

– keep in mind the duties and obligations which are owed to creditors in the pre-appointment period and be aware of the potential liability which may attach to any person who is party to a decision that causes a company to incur debt and who knows there is no good reason to believe it will be repaid. Such liability is not restricted to directors.

Further, SIP16 specifically requires that administrators acting on a pre-packaged sale:

– demonstrate that they have performed their functions in the interests of the company’s creditors as a whole; and

– demonstrate that they have avoided unnecessarily harming the interests of creditors as a whole when realising property to distribute to secured or preferential creditors.

SIP16 and Disclosure

Unsecured creditors have no say in a “pre-pack”. Therefore, it is necessary to provide creditors with a detailed explanation and justification of why the sale was undertaken to ensure they are satisfied that the administrator has acted with due regard for their interests. The emphasis is on transparency. The information to be disclosed by the administrators, after making appropriate enquiry, to creditors in all cases where there is a “pre-pack” includes:

– the source of the administrator’s initial introduction;
– the extent of the administrator’s involvement prior to appointment;
– any valuations obtained of the business or the underlying assets;
– the alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes;
– why it was not appropriate to trade the business, and offer it for sale as a going concern, during the administration;
– details of requests made to potential funders to fund working capital requirements;
– whether efforts were made to consult with major creditors;
– details of the assets involved and the nature of the transaction;
– the consideration for the transaction, terms of payment, and any condition of the sale contract that could materially affect the consideration;
– if the sale is part of a wider transaction, a description of the other aspects of the transaction;
– the identity of the purchaser(s);
– any connection between the purchaser and the directors (or former directors), shareholders or secured creditors of the company;
– whether any directors had given guarantees for amounts due from the company to a prior lender, and whether that lender is financing the new business; and
– any options, buy-back arrangements or similar conditions attaching to the contract of sale.

Discussion

Pre-packaged administration sales are considered a useful method for maintaining businesses and maximising value. However, they are often criticised for giving the impression of a company being distressed one day and fully operational the next. SIP16 is intended to improve transparency on pre-packaged administration sales, hence the heavy emphasis on disclosure to all creditors.

Recent examples of pre-packaged administration sales include Whittard Of Chelsea and high street clothes store USC. No doubt many more will follow during the course of 2009.

For further information please contact James Walton or the Partner with whom you usually deal