SIP 16 Insolvency Service report - some mixed reviews on pre-packs
The Insolvency Service has published its long awaited report into pre-packaged administrations. The report is entitled: Report on the First Six Months' Operation of Statement of Insolvency Practice 16, Insolvency Service, 20 July 2009. Press comment has been mixed so far with the Times leading with "Accountants behind pre-pack bankrupt deals are mocking rules, says report". See also "Not-so-sweet smell of insolvency excess." Unsurprisingly, R3 are more positive. They note:
"R3 welcomes further evidence that pre-packs work as a rescue tool...
The report, issued by the Insolvency Service, reviewed the compliance with Statement of Insolvency Practice 16 (SIP 16) by insolvency practitioners undertaking pre-packaged administrations. The SIP sets out the standards practitioners are required to follow when carrying out a pre-pack, particularly concerning the disclosure of information to creditors.
The report found that:
- 65% of cases were fully compliant with the disclosure requirements of SIP 16
- Just 3% of cases reviewed were referred to regulators
Peter Sargent, President of R3 commented: “Despite popular concerns about pre-packs being a ‘stitch-up’, it is clear from these findings that there is no systematic abuse of the procedure as far as Insolvency Practitioners are concerned.”
Commenting on the 32% of cases that were not fully compliant, the Insolvency Service was at pains to point out that failure to disclose did not, in itself, imply a ‘lack of good faith or failure to act in the interest of creditors’ and that apparent non-compliance may be ‘attributed to early differences in interpreting the requirements of the guidance’.
Indeed, findings from a report commissioned by R3 in April 2009 showed that 99% of R3 members believed that they were complying with the guidelines.
“R3 was instrumental in drafting this guidance and we want to make sure that our members are adhering to it. The guidance has only been in place for six months and we are confident that any confusion about the information that needs to be provided will be clarified as the guidance beds-in.”
In the small percentage of cases where Insolvency Practitioner’s conduct has been referred to the regulators R3 is encouraging regulators to investigate, and deal with any deliberate wrong-doing.
“Pre-packs are a very misunderstood insolvency tool and the benefits, for example, the numbers of jobs saved, are often lost in concerns over the impact on unsecured creditors. In order to build more confidence in the procedure, it’s vital that any misuse is weeded out and dealt with appropriately,” Peter Sargent concludes."
The main conclusions of the report are:
"The Insolvency Service is satisfied that SIP 16 does improve transparency for creditors and that, properly applied, the SIP will ensure creditors receive the information they need to decide whether any given pre-pack sale was in their best interests. It should be borne in mind that these are early days for the operation of SIP 16 and insolvency practitioners are still learning the full implications of the SIP for their reporting to creditors. We also have no evidence that the pre-pack process is being systematically abused by directors to materially disadvantage creditors. A further report on the operation of the SIP will be published in early 2010."
"This is the ultimate statement of where the law on IVAs is to be found in our great common law...