Insolvency Service Announcement: New Approaches to Pre-Packs
The Insolvency Service have published the written ministerial statement of Mr Ed Davey MP the Minister with responsibility for the Insolvency Service within BIS. The statement is entitled: "Improving Transparency and Confidence in Pre-packaged sales in Administrations (pre-packs)." The substance of the press release note:
"Everyone who is affected by insolvency is entitled to have confidence that insolvency procedures are used fairly and that insolvency practitioners deliver the best possible outcome in what are often difficult and challenging circumstances. It is particularly important that suppliers, who often extend credit on unsecured terms, have confidence in the insolvency regime, as a lack of confidence is likely to restrict the availability of credit.
I am today announcing measures to improve transparency and confidence in pre-packaged (pre-pack) sales in administration. These will help ensure that in these cases as much is fairly returned to creditors as possible. These measures are in line with the policies of this Government to drive balanced and sustainable growth and will provide real benefits to business.
The merits of pre-pack sales have continued to be the subject of much debate. In response to the concerns raised, the previous Government launched a consultation exercise in March 2010. The responses make it clear that the greatest cause for concern is where the business and assets are sold back to the current management or a connected party - something that is often referred to as “phoenixism”.
I recognise that pre-pack sales offer a flexible and speedy means of rescue and can be the best way of maximising returns for creditors. I do not wish to outlaw them. But they must be done fairly and reasonably. Where such sales are at undervalue, creditors get less than they should. Competitors who pay their debts in full also suffer.
I want to make sure that creditors have a fair chance to have their voice heard. I also want to enable others to scrutinise such transactions after the event to ensure that deals being struck are fair in the circumstances.
In order to inject greater transparency into the process I intend to require administrators to give notice to creditors where they propose to sell a significant proportion of the assets of a company or its business to a connected party, in circumstances where there has been no open marketing of the assets. This will enable creditors to express concerns, which the administrator would need to consider, or to make a higher offer for the assets, and in cases where the circumstances justify it, apply to the court for injunctive relief.
These options can be exercised before the sale has taken place, and therefore reflect concerns raised by stakeholders in their responses to the consultation. The new requirements will apply not just to pre-packs but to any sales back to connected parties in an administration where there has been no open marketing of the assets.
Administrators already need to provide a detailed explanation of why a pre-pack sale was undertaken to creditors in compliance with professional standard Statement of Insolvency Practice 16. These will in future need to be included in their administration proposals which are lodged at Companies House, making the information available to business as a whole, including, for example, credit reference agencies.
This information may be of particular interest to suppliers and others considering doing business with the purchasing company. Administrators will also need to confirm that the sale price represents, in their view, best value for the creditors.
We are today also publishing a report on compliance with the Statement of Insolvency Practice 16 (a professional standard setting out what information must be disclosed to creditors in pre-packs) during 2010. Overall levels of compliance have increased, showing that in the great majority of cases necessary statements are now being given (after the event) to creditors.
However in a minority of cases the information is insufficient, and in these cases the concerns have been reported to the relevant authorising body. My officials will be liaising with the various bodies to ensure that there is a consistent approach taken to lack of compliance.
A copy of the consultation and summary of responses, together with the report on compliance with the Statement of Insolvency Practice 16 can be found on The Insolvency Service’s website at www.insolvency.gov.uk."
This is an interesting development. A number of points can be made. First, will this new notice requirement not destroy one of the key benefits of a pre-pack, i.e. the ability of the procedure to help retain value, supplier continuity, etc, due to the fact that the insolvency issues are kept private? Won't this notice requirement cause a diminution in value and issues for the IP from dissentient creditors? Might this simply be a form of unsecured creditor placation, i.e. the IS paying lip service to unsecured creditors demands but without really causing any real practical substantial help?
A number of commentators have already commented on this development. Mr Alistair Hill of Milbank, Tweed, Hadley & McCloy LLP, has started an interesting Forum Discussion on the Insolvency Lawyers Association (ILA) website. Mr Hill has observed:
"Whilst the focus of the policy is quite clearly (and correctly) to protect unsecured creditors in some of the smaller pre-packs which take place to existing management, the reforms may also give junior creditors in more complex capital structures some ammunition which they have to date lacked (see key extract from the Minister's statement below). Devil will inevitably be in the detail however as to the definition of connected party etc. Will be interesting to see if the reform gives mezzanine and other junior creditors the ability to derail (or at least delay) some of the larger scale restructurings which have been implemented using a pre-pack."
R3 have noted that:
"Government proposals announced today introducing a three day notice period for pre-pack sales to connected parties could mean unsecured creditors lose out, as more businesses are liquidated instead of pre-packed. While any attempt to bring greater transparency to the pre-pack process is to be welcomed, an unintended consequence could be the value of a business depreciating and delay could jeopardise corporate rescues.
Steven Law, President of R3, the insolvency trade body commented:
“Any measure that boosts confidence in the pre-pack procedure is to be broadly welcomed. However it is important to note that a pre-pack is chosen is due to the speed of the procedure which helps preserve the value of the business. Three days is a long time in business, and if unable to trade in that period, is at risk of losing key staff and customers. When faced with this option, directors may simply decide that liquidation is a better route, and this would reduce returns to both secured and unsecured creditors and result in considerably fewer jobs being saved than under a pre-pack.”
This announcement coincides with the annual Government report on insolvency practitioner compliance with (SIP 16) reporting on pre-packs. In 2010 only 1.7% of cases were referred to the Recognised Professional Body for disciplinary procedures and general compliance increase to 75%.
The Government’s monitoring report on pre-pack compliance also indicates that there is “no reliable evidence to suggest that misconduct by directors is any more prevalent in pre-pack cases than in conventional administrations”. Sales to connected parties tend to happen because there is simply no other buyer at the table and also occur in 40% of business sales.
Steven Law continued: “It would be better for the business rescue culture if the Government looked at ensuring suppliers are bound in the event of a formal insolvency or were prevented from making ransom payments. We have put these ideas to Government as part of our ‘Holding rescue to ransom’ campaign. If today’s proposals are to be taken forward we advocate that our ideas are also brought into statute to help businesses stay held together during the three day period.”
Insolvency practitioners estimate the change in legislation R3 is calling for will reduce the number of pre-packs by more than a fifth."
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