More pre-pack pain….

On 16th June 2014 Jenny Wilmott, the Business Minister, made a ministerial statement outlining government proposals “to improve confidence in the insolvency regime”.

Insolvency practitioners in particular will note with interest that there is going to be legislation in due course with a reserved power to move regulation to one recognised professional body (RPB).

However, for anyone involved in restructuring work the ministerial statement should be read in full, if only for the detail it gives on the new proposed pre-pack regime. Thankfully, the Graham Review has concluded that “pre-pack administrations have an important place in the UK insolvency landscape”. However, it has recommended reform to increase transparency. It does occur to us that some of the potential reforms may affect the workability of some pre-pack restructurings happening quickly but readers can form their own views! In fairness, government seem interested in boosting survival rates of purchasing companies, and presumably have attempted to come up with a series of compromised measures. The difficulty is it is not yet clear how IPs are to react to non-compliance given many of the duties are (thus far) imposed on a voluntary basis on connected party pre-pack purchasers.

The Graham Review can be found here:
https://www.gov.uk/government/consultations/insolvency-practitioner-regulation-and-fee-structure

Government have accepted the recommendations in full and therefore every IP involved in corporate restructuring should read these thoroughly. In practice what is proposed is that on a voluntary basis, the RPBs impose an amended SIP 16 which makes some major changes in the case of pre-pack administrations. Quoting from the Graham Review’s own summary these are:

“Key recommendation 1: Pre-pack Pool. On a voluntary basis, connected parties approach a “pre-pack pool” before the sale on disclosed details of the deal, for the pool member to opine on.

Key recommendation 2: Viability Review. On a voluntary basis, the connected party complete a “viability review” on the new company.

Recommendation 3: SIP 16: that the Joint Insolvency Committee considers at the earliest opportunity, the redrafted SIP 16 [produced in the review].

Recommendation 4: Marketing: that all marketing of business that pre-pack comply with six principles of good marketing and any deviation of these principles be brought to creditors’ attention.

Recommendation 5: Valuations: SIP 16 be amended to the effect that valuations must be carried out by a valuer who holds professional indemnity insurance.

Recommendation 6: SIP 16: that the Insolvency Service withdraws from monitoring SIP 16 statements and that monitoring be picked up by the Recognised Professional Bodies.”

The government is reserving the power to legislate if these are not adopted.

In our experience of urgent pre-packed restructuring then it is potentially too early to say how much difficulty these recommendations will cause. For example if the pre-pack pool contains experienced commercial professionals who understand restructuring and can move quickly there may not be significant delay (it is recommending that a review from the pool will be no more than half a day’s work). However, given that many connected pre-packs are low value, in and of itself this is going to add to cost (although it seems to be intended the connected party purchasing would pick up the cost). It should be noted that the recommendations in relation pool review do not affect sales to unconnected parties.

In relation to recommendation 1 particularly another point that needs to be borne in mind is that the Graham Review seems to propose approaching the pool at all is entirely voluntary and the amended SIP 16 will simply indicate whether or not the connected party was willing to approach the pool (and whether there was a positive statement by the pool member). How then is an IP to proceed if the highest offer comes from a connected party, or the offer that produces best value to the creditors, but they are not willing to spend the money going to the pool?

Similarly the viability review proposed is voluntary on the connected party. If an insolvency practitioner’s duties are to the general body of creditors in the insolvency, to what extent should he or she be concerned about potential problems for the connected parties’ viability?

In relation to the marketing recommendations then the detail is worth reading but in general duties are now going to be placed on the practitioner to be able to explain why marketing was carried out in the way it was done.

It should be said that in the event that Scottish independence is won by the Yes campaign, then there could of course be further radical changes for corporate insolvency more generally in Scotland.

Meantime, we wait to see the Joint Insolvency Committee response….

Eric Baijal is Head of Insolvency and Restructuring at BBM: emb [AT] bbmsolicitors [DOT] co [DOT] uk