Following a report by accountant Teresa Graham, the rules for pre-packaged sales of insolvent businesses have been updated, and the oversight of the practices has been altered. Changes in the Statement of Insolvency Practice (SIP) were introduced on 1st October and 1st November 2015, while the pre-pack pool was introduced on 2nd November.
Pre-pack insolvency is an approach to Administrations where the insolvency practitioner (IP) makes arrangements for the sale of the business or its assets in advance, and the sale is made almost immediately on appointment of the administrator.
This means that trading costs during administration are kept to a minimum. Besides reducing the risk for the administrator, it means that there are likely to be more funds, which will maximise the returns to creditors, and that the most viable parts of the business can be saved, along with as many jobs as possible. However, the system has been criticised for lack of transparency and possible conflicts of interests.
A revised version of the SIP9 rules came into force on 1st October 2015. Under the previous version, IPs weren’t permitted to offer creditors estimates of expenses before formal appointment as administrator, leaving a considerable area of financial uncertainty. Also, reports from IPs were cumbersome, having to slavishly follow a set format.
The revised version, besides allowing flexibility that allows reports to be more readable, defines what a fee estimate must include. This will need to be set out to creditors in advance, detailing the work the IP expects to do, including any anticipated complexities. This will also cover anticipated expenses, including costs for having the assets valued, debt collection etc. It’s important to bear in mind that, though this should be as accurate as possible, it won’t be a binding figure.
One of the main criticisms of pre-pack insolvencies is that the lack of transparency could allow the arrangements to favour the IP, the company’s directors or shareholders at the expense of creditors. Under the new SIP16, which comes into force on 1st November, the IP is obliged to provide creditors with a full explanation of why the decision was taken to follow the pre-pack route.
Changes in Oversight
Current rules require IPs to send disclosures to the Insolvency Service, but following implementation of the new SIP16, the main oversight will be carried out by an independent body called the pre-pack pool. This will scrutinise whether a “connected party” (such as a director of the failed business) has been involved in the decision to use the pre-pack approach.
One of the selling-points of the pre-pack pool is that it promises a fast turn-around, with decisions normally given within 48 hours. This will, of course, prevent the process from dragging on and haemorrhaging money — and this should benefit all parties.