Pre-packs: Enhanced Statement of Insolvency Practice 16 comes into force

A "pre-pack" is a pre-packaged sale of a business and/or some or all of its assets negotiated in advance of the administration of a company and completed by the administrators immediately upon or shortly after, appointment. Whether they are regarded positively or negatively depends upon the perspective from which they are viewed.

Advocates of pre-packs assert that:

• Pre-packs can result in the quick and relatively smooth transfer of a business compared to a normal administration. This can reduce the costs of the administration process, which ultimately results in a better return for creditors.
• Pre-packs can minimise the erosion of supplier, customer and employee confidence that is inevitably caused by insolvency proceedings and in so doing preserve the value in the business for the benefit of creditors.
• There is often no real alternative to the pre-pack. Companies which are pre-packed are insolvent and as such unsecured creditors are unlikely to recover all monies owed to them anyway. The pre-pack is not the primary cause of the unsecured creditors losing out, rather that is down to the company's inherent financial difficulties.

Critics, on the other hand, argue that

• There is a lack of transparency with unsecured creditors often not realising that a pre-pack is going to happen until it has gone through (secured creditors, on the other hand, are involved in the process as they need to consent to the release of their security)
• Businesses or assets which are sold by way of a pre-pack are usually sold with limited marketing compared with a normal administration. As such, a pre-pack sale may not achieve the best possible return.
• Pre-packs enable the owners of a debt ridden company to keep the 'good' parts of a company - for example assets, profitable contracts - yet discard the 'bad' parts - debts and liabilities owed to creditors. The term "pre-packs" is therefore regarded by some as simply another term for the unlawful practice of creating "phoenix" companies

The New SIP 16

On 1 November, an updated Statement of Insolvency Practice 16 ("SIP") came into force, setting out standards to be adopted and information to be provided by insolvency practitioners regarding the pre-pack sale. The primary aim of the new enhanced SIP is to improve the transparency of a pre-pack transaction by requiring Insolvency Practitioners to provide meaningful information to creditors more quickly.

It is important to note that SIPs are not "law", nor are they intended to be regarded as definitive statements of the law. Instead, SIPs are intended to set out basic principles and procedures which Insolvency Practitioners should follow. However, departure from SIPs may be considered by a practitioner's regulatory authority for the purposes of possible disciplinary or regulatory action. Whilst not having force of law, Insolvency Practitioners would be foolish not to adhere to the new SIP.

SIP 16 contains key compliance standards that an Insolvency Practitioner should adhere to during the pre-appointment stage (also known as the 'preparatory' stage) and the post appointment stage.

Whilst the new SIP 16 aims to ensure the provision of more detailed and useful information to creditors, the new provisions do not include any obligation to provide advance notice to creditors where the administrators propose to sell a significant proportion of the company's assets or business to a party already connect to the company. For that reason, pre-packs will likely continue to be viewed with disdain by creditors with the new SIP doing nothing to address the commonly held perception that pre-packs are a phoenix by another name.

Rollits' Insolvency Group has considerable experience in advising organisations in financial difficulty, creditors and Insolvency Practitioners on a wide range of matters. Please contact Ralph Gilbert, partner and Head of Rollits' Insolvency Group on 01482 323239 for more information.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.