Statement of Insolvency Practice 16 took effect from 1st January 2009 and addressed areas of concern in relation to pre-packaged sales of business by insolvency practitioners appointed as Administrators. The Insolvency Service conducted a survey of the effectiveness of the requirements of the SIP and also the extent to which insolvency practitioners complied with the prescribed disclosure requirements.
As part of the surveys findings were that not all insolvency practitioners complied with the Insolvency Service interpretation of compliance with SIP16, it is worth setting out the items that the SIP requires to be disclosed to creditors.
These are:-
- The source of the administrator’s initial introduction
- The extent of the administrator’s involvement prior to appointment
- Any marketing activities conducted by the company and/or the administrator
- Any valuations obtained of the business or the underlying assets
- The alternative courses of action that were considered by the administrator, with an explanation of possible financial outcomes
- Why it was not appropriate to trade the business, and offer it for sale as a going concern during the administration
- Details of requests made to potential funders to fund working capital requirements
- Whether efforts were made to consult with major creditors
- The date of the transaction
- Details of the assets involved and the nature of the transaction
- The consideration for the transaction, terms of payment, and any condition of the contract that could materially affect the consideration
- If the sale is part of a wider transaction, a description of the other aspects of the transaction
- The identity of the purchaser
- Any connection between the purchaser and the directors, shareholders or secured creditors of the company
- The names of any directors, or former directors, of the company who are involved in the management or ownership of the purchaser, or of any other entity into which any of the assets are transferred
- Whether any directors had given guarantees for amounts due from the company to a prior financier, and whether that financier is financing the new business
- Any options, buy-back arrangements or similar conditions attached to the contract of sale
The survey concluded that the SIP does improve the transparency for creditors and that if it is properly applied it gives creditors the information needed to decide whether the pre-packaged sale was in their best interests. However the survey also concluded that there is significant room for improvement with compliance with the SIP and identified three specific areas where this should be achieved.
Firstly, the SIP does not specify a time scale for the disclosures to be made to creditors. The Insolvency Service considers that the information should be sent to creditors on completion of the sale.
Secondly, full details of business valuations and marketing activities are necessary for creditors to determine whether the sale is in their interests.
Thirdly, although not a financial consideration, it is important that any connection between the insolvent company and the purchaser is fully disclosed. Any failure in this area may create a perception that the directors and insolvency practitioners are colluding to withhold information from creditors. This will compromise confidence in the integrity of the sale of both the business and the insolvency regime.
The Insolvency Service is due to report again early in 2010 and we expect to revisit this subject once again in the near future. In the meantime, if you have any clients who receive SIP16 disclosures and are unsure whether they are fully compliant or wish any advice to assist them in determining whether the sale is in their interests, please contact us in the usual way.
There is nothing in the review that indicates that a pre packaged sale was not in the interests of creditors in any of the cases examined. However, we believe that the SIP itself will be revised to improve transparency and thus creditors confidence that the Administrator is acting in their best interests.
Date:26 January 2010
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