Pre packets

Comments by the Association of Business Recovery Professionals (‘R3’) in
response to the consultation document issued by the Insolvency Service in March
Introduction and Option 1
1. The consultation document invites views on ways in which the transparency
of pre-packs, and confidence in pre-packaged sales, can be improved. The
document notes two factors that already encourage transparency. These are
Statement of Insolvency Practice 16, and the new rules requiring disclosure of
pre-appointment work in the administrator’s statement of proposals. Taken
together, these support of the first suggested option, which is to make no
change to current arrangements. Whether this will be perceived by the wider
business community as a satisfactory response is a matter for government to
Option 2 – Giving statutory force to the SIP 16 disclosure requirements
2. The important point to note about SIP 16 is that it does not just set out a list of
items to be disclosed for its own sake, but is intended to influence the conduct
of practitioners involved in setting up a pre-packaged sale at the time the
transaction is entered into. Its purpose is to try to ensure that pre-packs are
only undertaken where they can be fully justified and are in the best interests
of creditors. The effectiveness (or otherwise) of SIP 16 should therefore be
judged by whether there is a decline in the number of pre-packs which are
perceived as being unjustified. We are not aware that data is currently
available to make this assessment.
3. As far as we are aware, the vast majority of insolvency practitioners are
complying with the SIP 16 requirements, and it is therefore reasonable to
suppose that it is having the desired effect on pre-appointment conduct when
considering whether pre-pack arrangements are appropriate. If this is so, it is
unlikely that giving statutory force to the disclosure requirements will lead to
any substantial change in the number of perceived unjustified pre-packs.
4. Giving statutory force to the SIP 16 requirements implies that the regulatory
bodies are not currently taking effective action in cases of non-compliance.
We are not aware of any evidence that this is the case. Moreover, the
regulatory bodies are able to impose a range of sanctions, including fines in
excess of the statutory penalties laid down for breaches under the Insolvency
5. Statutory provisions would also suffer from inflexibility. It would be difficult
to change them to reflect changed business circumstances.
6. We therefore doubt the merits of giving statutory force to the disclosure
requirements However, if it is decided to proceed down this route, it will be
important to ensure that penalties are proportionate to the relevant breach and
there is no risk of draconian sanctions for minor infringements.
Option 3 – Restricting exit to compulsory liquidation
7. It appears that the aspect of pre-packs that creditors dislike the most is where
there is a sale to a connected party. We can therefore see some justification for
independent scrutiny of the transaction after the event in such cases. Such
scrutiny would best be carried out by a liquidator appointed following the
administration. In order to demonstrate independence where there has been a
sale to a connected party, the administrator should not be able to take the
dissolution exit route or be allowed to act as liquidator unless creditors are
content for this to happen. However, we see no reason to restrict the exit route
in such cases to compulsory liquidation. This is often not the best option for
creditors because of the effect of the Secretary of State fees, and we would
also allow exit through creditors’ voluntary liquidation.
8. We think there is a case for increasing creditor involvement by amending the
Insolvency rules to require the administrator to explain the proposed exit
routes to the creditors, and obtain their approval shortly prior to the end of the
administration. Currently, administrators’ proposals tend to leave the exit
route to the administrator’s discretion.
Option 4 – Require different insolvency practitioners to undertake pre- and postappointment
9. We can see no benefit in this. The only reason there can be for undertaking a
pre-pack is that it is in the best interests of the creditors. If one insolvency
practitioner reaches this conclusion after undertaking the necessary
preliminary work, we cannot see what useful purpose is served by having a
different practitioner complete the sale and doing the rest of the postappointment
work. Any delay in completing the sale, or decision to abort it, is
only likely to be harmful to the business and will undoubtedly duplicate costs.
Option 5 – require the approval of the court or the creditors for pre-pack sales to
connected parties
10. The courts have made it clear on a number of occasions that they are
unwilling to make commercial decisions or question commercial judgements
made by insolvency practitioners. It is hard to see what a judge would be
expected to do when confronted by a statement from an insolvency
practitioner that the proposed pre-pack is in his judgement the best option for
the creditors, especially in the absence of any argument to the contrary.
11. In most cases, negotiations for a pre-packaged sale have to be carried out in
confidence, and by definition the process takes place in the period before the
company enters formal insolvency. If the strategy is to be successful and the
business is to survive, it is crucially important to avoid precipitate action by
creditors. Requiring the approval of creditors to the proposed pre-pack is
likely to lead to just such an outcome, and for this reason we think this is an
unrealistic option.
12. It is a fact of commercial life that in order to achieve the best return for
creditors an accelerated sale through a pre-pack will sometimes be the best
option. Any measures taken to impede this are likely to be to the detriment of
creditors. Although the consultation document is aimed at pre-packs
generally, the main focus should be where there is a sale to a connected party,
as this is the principal cause of creditor discontent. We remain of the view that
increasing transparency and strengthening creditor participation is the best
approach to this problem as exemplified by SIP16 and the amendments to the
Insolvency Rules.
Association of Business Recovery Professionals
24 June 2010

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