Will this new SIP16 quench the fires burning for pre-packagers? Will it improve the transparency of, and confidence in, pre-packs, which was the stated aim three Secretaries of State ago when this SIP16 revision process began? Who knows, but woe betide any IP who turns out a non-compliant SIP16 disclosure after 1 November!
So what changes do firms need to make over the next four weeks?
The new SIP16 timescale is half that of Dear IP 42: the explanation should be provided with the first notification to creditors and in any event within seven calendar days of the transaction (paragraph 11).
The “Information Disclosure Requirements”
Now that there are 25 disclosure points (as compared with the previous 17), I think there is no practical way of ensuring compliance unless templates stick rigidly to the list in the SIP; personally, I think that’s a shame, but there it is. To avoid any possible confusion, perhaps it is best to create a standalone document, which can form an appendix/attachment/enclosure to the letter to creditors and to the administrator’s proposals, as SIP16 now requires that the statement is provided in proposals (although I think most IPs are doing this already).
You may find that some disclosure points that look familiar to those in the current SIP have acquired subtle differences – e.g. not only does “any connection between the purchaser and the directors, shareholders or secured creditors of the company” need to be disclosed under the new SIP, but “or their associates” has been added. Therefore, rather than trying to edit SIP16 lists appearing in existing templates, perhaps it’s as well to tear them up and start afresh. Also, the new SIP16 groups points under sub-headings, which creates a better structure for the disclosure than the previous SIP, so I think it would help coherence (and help anyone checking off compliance) to follow the SIP’s order.
The old SIP’s paragraph 8, which was so loved by the regulators as encapsulating what the SIP16 disclosure was all about, appears almost word-for-word as a key principle in this new SIP. Paragraph 4 states: “Creditors should be provided with a detailed explanation and justification of why a pre-packaged sale was undertaken, to demonstrate that the administrator has acted with due regard for their interests”. Although the Information Disclosure Requirements seem all-encompassing, could someone argue that ticking all those boxes does not meet the paragraph 4 requirement but that, in some cases, a bit more fleshing-out is required? Now that they have been beefed up, I don’t think there’s much risk that the Insolvency Service/RPBs would expect more than those Information Disclosure points, but it does suggest that a degree of sense-checking would be valuable: perhaps someone in the IP’s firm (but not involved in the case) could cold-read draft SIP16 disclosures and see whether they hang together well or whether they leave the reader with questions. I know that it’s a practice that some IP firms already conduct in the interests of transparency.
Other Required Disclosures
I think it would be easy to focus exclusively on the “Information Disclosure Requirements”, but that would be a mistake as there are other items nestled within the SIP that need to be taken care of.
• Paragraph 3 states: “An insolvency practitioner should differentiate clearly the roles that are associated with an administration that involves a pre-packaged sale (that is, the provision of advice to the company before any formal appointment and the functions and responsibilities of the administrator). The roles are to be explained to the directors and the creditors.” Although a similar paragraph appeared in the old SIP with regard to communicating with directors, it might be well to double-check that this, as well as the additional points in paragraph 5 of the SIP, are covered off in the engagement letter to directors. And note that, now, the distinction between the roles of the IP also needs to be explained to the creditors.
• Paragraph 9 introduces a new requirement. It states that the pre-pack explanation should include “a statement explaining the statutory purpose pursued and confirming that the sale price achieved was the best reasonably obtainable in all the circumstances”.
As in the old SIP16, if the disclosure points are not provided, the administrator should explain why. There are a couple of other required explanations for not providing things that are new:
• If the seven day timescale is not met for the SIP16 disclosure, the administrator should “provide a reasonable explanation for the delay” (paragraph 11). If this timescale cannot be met, the SIP requires the administrator to provide a reasonable explanation of the delay. Although the SIP does not state it, presumably you would provide this explanation within your SIP16 disclosure that you would send as swiftly as possible, albeit late.
• If the administrator has been unable to meet the requirement to seek the requisite approval of his proposals as soon as reasonably practicable after appointment, he should explain the reasons for the delay (paragraph 12), again presumably within the proposals whenever they are issued.
The new SIP pretty-much repeats the old SIP’s requirements for some internal documents:
• Under the heading, Preparatory Work, paragraph 7 states: “An administrator should keep a detailed record of the reasoning behind the decision to undertake a pre-packaged sale” (this was in the old SIP’s introductory paragraphs).
• Under the heading, After Appointment, paragraph 8 states: “When considering the manner of disposal of the business or assets as administrator, an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. Okay, it doesn’t mention explicitly internal documents, but it seems to me that contemporaneous file notes – justifying the manner of disposal as in the interests of creditors as a whole or, if the administrator does not believe that either of the first two administration objectives are achievable, that it does not unnecessarily harm the interests of the creditors as a whole (i.e. Paragraphs 3(2) and 3(4) of Schedule B1 of the Insolvency Act 1986) – should help demonstrate such consideration.
So is there anything in the old SIP that has been left out of the new SIP? No, nothing of any real consequence, although it did strike me how far we’ve come – that it was felt that the 2008 SIP16 needed to explain, with case precedent references, that administrators have the power to sell assets without the prior approval of the creditors or court. Have we moved on sufficiently from those days, do you think?
When you think of it, it wasn’t too long ago when we were faced with draft regulations requiring three days’ notice to creditors of any pre-pack; they were set to come into force on 1 October 2011. And I don’t think the other ideas, for example that all administrations involving pre-packs should exit via liquidation with a different IP/OR appointed liquidator, have completely disappeared.
However, I think that what this new SIP does is provide us with a clean slate. To some extent, we can file away the Insolvency Service’s statistics of non-compliance with the old SIP16 along with our copies of Dear IP 42 and we can concentrate on getting it right this time. However frustrated and irritated we might feel at having to meet these rigid disclosure requirements, I hope that IPs will strive hard to meet them. It may not silence the critics – let’s face it, it won’t – but it will give them one less stick with which to beat up the profession.