The ethical implications of a pre-pack administration are often called into question due to what is often perceived as a lack of transparency, particularly as the business will be sold before creditors are notified. What’s more, it’s not uncommon for a business to be sold to a connected party of the insolvent entity, which can cause further mistrust amongst creditors.
In order to combat such wariness and allay the concerns of creditors, the Insolvency Service implemented Statement of Insolvency Practise Number 16 (SIP 16). SIP 16 is designed to prevent the misuse of pre-packaged sales of businesses by outlining the details of such an arrangement with sufficient clarity, which is why it is essential for insolvency practitioners to follow SIP 16 guidelines to the letter when organising any kind of pre-pack administration deal. Creditors should be provided with this statement upon notification of the sale, but there should certainly be no more than a week’s delay without sufficient cause and an explanation provided to creditors for the hold-up.
Clarifying the Insolvency Practitioner’s Role
One of the key areas covered in SIP 16 is the clarification of the insolvency practitioners role. They will fill at least one of two: an advisory or an administrator role. As an advisor, an IP will offer advice based on the financial position of the company and the options available to it. Their responsibilities do not cover the advising of directors, who must seek their own legal advice, and valuation, which must be carried out by a professional valuer. Meanwhile, an administrator will oversee the pre-pack sale process. An Insolvency practitioner is able to fill both roles at the same time.
Advertising the Company
As far as creditors are concerned, the way in which the company is being marketed is of significant importance. It will be of import when determining how debt will be repaid, if at all, and thus should be carried out with a view to maximising the creditors’ returns. The methods by which this will be achieved should be clearly laid out, as well as the length of time the business will be advertised for. Having this clarified, particularly in light of how it will be of benefit to the creditors is of extreme importance in securing their trust in the pre-pack sale.
Giving the Creditors Full Transparency
Under SIP 16, an insolvency practitioner must clearly disclose the ways in which a pre-pack administration provides the best solution for creditors, as well as several key details in regards to the translation itself. Some of the key pieces of information that must be disclosed under SIP 16 include:
- The way in which the Administrator was introduced to the company
- How said Administrator was involved with the company before their appointment
- Reasons that the business was not traded as a going concern
- The alternate means explored before the company was declared insolvent, and their potential ramifications
- The identity of the purchaser
- The date of the transaction
- The connections, if any, between the company and the purchaser
- What, if any, attempts were made to consult with creditors and, if not, the reasons that there were not
- The details of all valuations, as well as the names and qualifications of the valuers
- Details of the assets sold
- The amount of money made during the sale, and the details of the transaction
- Any arrangements or conditions of the transaction
The requirements of SIP 16 extensively covers the essential information that a creditor needs to know when presented with a pre-pack administration, and the detailed clarification of the situation will help to boost creditors’ trust in the arrangement.
How can Ballard Business Recovery Help?
If you’re giving thought to potentially seeking a pre-pack insolvency solution then don’t hesitate to get in touch with our experienced team of insolvency professionals for informed, supportive advice, and have a look at our previous article on the advantages and disadvantages of pre-pack administrations.
