Every insolvency procedure has its own set of rules and regulations that must be adhered to. Before directors decide to use any particular procedure, they would do well to understand these regulations adequately. For a pre-pack administration, SIP 16 regulations must be strictly followed to ensure the procedure is carried out lawfully.

In this article, Clarke Bell details the pre-pack administration process, SIP 16 regulations, and what exactly these regulations are. You can then make the best decision for your company.

What is a pre-pack administration?

A pre-pack administration is essentially a procedure that facilitates the quick sale of a company facing financial issues. Once executed, the company in question will first sell its assets, then be transferred to new ownership. New management can either be the directors of the old company, or an entirely unrelated third party. Whatever the company’s fate, a sale agreement is typically drawn up before the procedure even begins, allowing the sale of the company to go unimpeded.

A pre-pack administration has two especially useful applications. Firstly, the procedure is most used by directors looking to start fresh. A new company will be set up, the ailing company and its assets will be sold, and the directors will be able to trade under a more financially viable company. The second main use for a pre-pack administration is to sell a company without first entering it into another insolvency procedure. Filing for insolvency can drastically bring down the value of a company for obvious reasons; with a pre-pack administration, no such declaration is made, and the company can be sold at a value unmarred by any insolvency filing.

Ethics of a pre-pack administration

Though the above applications demonstrate the considerable advantages of a pre-pack administration, they also betray the apparent disadvantages. Namely, the process can easily be abused by unscrupulous directors to evade paying debts and other liabilities. This fact has led to a fairly negative view of pre-pack administrations being held by companies, creditors, and the public at large. As such, suspicion can be cast on any pre-pack administration sale, no matter the reason behind it.

To combat this default negative view of pre-pack administration sales, and to separate the good from the bad, the Insolvency Service has implemented SIP 16 regulations. These regulations aim to shine a light on the underhanded pre-pack administration sales, holding unscrupulous directors accountable, and allowing law-abiding directors to enjoy the procedure’s benefits. Over time, it is hoped that this will lead to a more positive view of pre-pack administrations, making it a more viable option from a public relations perspective.

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What is SIP 16?

SIP 16, or Statement of Insolvency Practice number 16, is an effort by the Insolvency Service to reduce a company director’s ability to misuse a pre-pack administration. It aims to make the procedure much more transparent, compelling the administrator to disclose important details to company creditors. The administrator must provide a written statement of why the decision to enter into a pre-pack administration was made, the alternative procedures considered, and why they were not chosen. This statement must be provided to creditors no more than a week after the sale, but the sooner, the better.

While this statement is an integral part of curtailing the ability to misuse a pre-pack administration, there are several other key areas addressed by SIP 16. These are:

Clarification of the insolvency practitioner’s role

During the pre-pack administration process, an insolvency practitioner will be appointed to fill at least one of two roles. The first is an advisory role, wherein the insolvency practitioner offers advice regarding the company’s current financial state and appropriate options. However, this role does not include advising directors, and the insolvency practitioner must clarify this. Company directors must seek out their own legal advice if they require it. Similarly, company directors should appoint a professional valuer to appraise the value of any assets, as this is not a part of the insolvency practitioner’s role.

The second role an insolvency practitioner will fill is an administrator role. This role entails the oversight of the pre-pack administration process, and can be filled by the insolvency practitioner appointed as an advisor, or a different one entirely.

Advertising the sale of the company

Another key area addressed by SIP 16 is the marketing of the company. Naturally, the company’s creditors have a keen interest in this area, as it can have considerable influence over how much debt can be repaid, if any at all. As such, the company should be advertised with a view to securing the highest value for creditors.

To accomplish this aim, a series of methods should be used to maximise the reach of the upcoming sale. Traditional methods, such as posting notices in newspapers, are one approach, though newer methods are also expected. This includes advertising online, on television, and potentially using social media. These methods must be employed as part of an overarching strategy, with the end goal being to earn the highest return possible. These methods and strategies must be documented by the insolvency practitioner and distributed amongst creditors.

By adhering to the above practice, the pre-pack administration is not likely to be viewed with much suspicion. A third party advertises the sale, ideally over a long period of time, and with a view to maximising the returns for creditors specifically. Given the increased transparency and marketing requirements, it is not as easy for underhanded directors to abuse the process.

Transparency

The key area addressed by SIP 16 is transparency. In addition to providing creditors with a statement and a plan for how the sale will be marketed, the insolvency practitioner must show how the pre-pack sale works best for creditors. Considerable detail must be provided, and when company assets are bought by the company’s directors, even more detail must be provided to explain and justify this decision.

To satisfy this requirement of transparency, a number of details are required. These details include:

• How the insolvency practitioner came to the attention of the company in question, and detail its involvement with the company beforehand, if any.
• A record of the consultation between directors and creditors. If no attempts to consult the company’s creditors were made, reasons why must be given.
• A record of the alternatives to a pre-pack administration that were considered.
• A detailed marketing strategy, including the methods used.
• A valuation of the company and its asset, alongside the name and credentials of the valuer.
• A list of all the assets must be provided, alongside the details of said assets.
• The identity of the purchasers of assets and their connection to the company, if any. If the company’s directors have purchased any assets, there must be a detailed reason behind this decision.
• The total amount raised by the sale.

By following these rules as laid out by SIP 16, you can ensure your pre-pack administration is fully transparent and that your obligations to creditors are upheld. In doing so, you can clearly demonstrate that you are not abusing the pre-pack administration procedure, and protect yourself from any legal challenges to the contrary.

Clarke Bell can help

If you are planning on placing your company into a pre-pack administration, then let Clarke Bell be there to support you. We have over 28 years of experience in helping companies find the best solution to their financial problems, and we can do the same for you, whether it be through a pre-pack administration or other means. Don’t hesitate to contact our team for a free, no-obligation consultation, and find out what we can do for you.