The Pre Pack Pool launched to sounds of applause from the likes of Anna Soubry MP and Teresa Graham, whilst most IPs have been keeping their own counsel at best. For IPs and their agents, the new SIP16 contains changes of more practical consequence than the Pool.
On the Compliance Alliance blog, I have set out some pointers on how to implement the changes into internal processes and documentation (http://thecompliancealliance.co.uk/blog/sips/sip16/). I’d also like to make a plug for my Fees Rules article for the ICAEW’s Insolvency & Restructuring Group’s newsletter, which I have reproduced on the CompAll blog (http://thecompliancealliance.co.uk/blog/practical/octfees/). I plan to present a webinar on the combined subjects of SIP9 and SIP16 in a few weeks’ time.
Here, I thought I’d explore the outlook from over the SIP16 parapet.
How many applications will the Pre Pack Pool see?
Shall we open a book on that question?
Here are the Administration and pre-pack stats:
I’ve drawn from the Insolvency Service’s insolvency appointments tables, extrapolating for a full year’s figures, and their annual regulatory and SIP16 monitoring reports.
If the pre-pack proportions are consistent, there would be 340 pre-packs over 2015 of which 228 would be to connected parties. In one respect, it’s a shame that the Insolvency Service has handed over SIP16-monitoring to the RPBs, as I guess we may lose this insight into the numbers in future.
The Pool has 19 members (I’m not sure why 20 is often-quoted, unless there is an anonymous member!) – the names are at https://www.prepackpool.co.uk/about-the-pool – so each one could be expecting up to one review each month. Of course, as many have noted, the reality could be far fewer given that applications are not mandatory. Although the government’s threat of statutory measures to control pre-packs has been breathed hotly, why should this prospect persuade the pre-pack purchasers of today to apply to the Pool?
Also, as the graph illustrates, Administrations have been on the decline for a number of years and I suspect that the additional hurdles raised via the revised SIP16 and the fear in some IPs’ minds of their regulator picking up on an unintentional SIP16 clanger will force the numbers lower still, as instead more deals may be done either before or after Liquidation (which I think is already a far more frequent occurrence).
How will the regulators view absent Pool opinions?
There seems to be some anxiety that the regulatory bodies will be critical of IPs who complete connected party (“CP”) sales that lack a Pool review. However, the new SIP16 puts little responsibility on the IP to press for a Pool application. It merely states:
“the insolvency practitioner should ensure that any connected party considering a pre-packaged purchase is aware of their ability to approach the pre-pack pool and the potential for enhanced stakeholder confidence from the connected party approaching the pre-pack pool and preparing a viability statement for the purchasing entity” (paragraph 9).
‘The IP should ensure that [the party] is aware of their ability…’ – that is pretty light touch.
The IP also needs to ask the CP for a copy of any Pool opinion, but of course there is no obligation on the CP to concede to that request. I understand that the CP can tick a box during the application to tell the Pool to provide a copy of the opinion to the IP, which at least might cut out the potential for some delay.
How should an IP react to a Pool application?
What would you do if you knew that the CP had applied to the Pool, would you wait for the opinion before concluding the sale? I asked this question of an IP the other day and I confess that I was surprised when he said that he would wait.
Admittedly, 48 hours might not be long to wait in the great scheme of things, although this presupposes that the CP gets their application in pretty sharpish. In view of the Pool’s wish-list (albeit not prerequisites), some of which carry not insignificant cost, the fact that the CP is probably being bombarded with issues from all directions and feeling ragged given their involvement in a limping company, and of course the inevitable reaction of “so you’re telling me I don’t have to make an application?”, the odds do seem stacked against a swift and comprehensive application to the Pool.
What would you do if the Pool’s answer was negative? The Pool’s Q&As are factually correct but tight-lipped on the consequence for a potential sale of a negative Pool opinion (remembering of course that a negative opinion means “there is insufficient evidence that the grounds for the pre-packaged sale is reasonable”):
“It is for the IP to decide whether to proceed with such a sale or not.
“IPs are subject to regulation and authorised to act as IPs by recognised professional bodies. The insolvency regulators look at practitioners’ conduct through complaints received and proactive monitoring. Where systemic problems are identified, the regulators have the ability to take appropriate action.
“A complaint would not be well founded solely on the basis that a pre-packaged sale transaction was entered into when an opinion had been issued that the evidence was insufficient to support the grounds for a pre-packaged sale.”
I think that everyone reasonable now appreciates that the IP has got to do what the IP has got to do. What would an IP do with a negative Pool opinion? Would it make him think again about the sale, even though he would not know what had been behind the Pool member’s decision? If it would not – on the basis that the IP knows what needs doing and can fully justify his actions – then why wait for the opinion?
Fortunately, I think negative Pool opinions will be very rare in any event. After all, why would a CP go to the time and expense of voluntarily applying to the Pool, if he thought that he would struggle to persuade the Pool that the pre-pack was reasonable? If the Pool does not a record a near-100% “pass” rate, I will be very surprised.
But would a 100% pass rate mean that the Pool has failed? I do hope it won’t be seen that way! After all, I suspect that applications will only be made to the Pool if the IP is moving towards concluding a sale; if the IP thinks the sale should happen, then let’s hope that the Pool rarely, if ever, disagrees. Also, I think there’s an argument that, if applications to the Pool become the norm (although I am not convinced they will be), then the absence of an approach to the Pool might lead onlookers to presume that the CP was uncertain it would pass muster. Therefore, even if the Pool notches up a 100% pass rate, creditors should feel confident that the wheat is distinguished from the chaff… so job done as regards improving confidence!
Quality agents step forward
For all its publicity, practically the Pool does not present the biggest SIP16 sea change for IPs. Of far more practical effect to IPs are the additions as regards marketing. This doesn’t mean that IPs’ past work has necessarily been at odds with the new standards, but inevitably practices and disclosures need to be adjusted to fit the now-codified standards.
Some agents have questioned the emphasis placed on having adequate PII as now required by the SIP, as they feel that qualifications – and especially RICS registration – are far better indicators of high quality and ethical services. I can see their point, however I think that the quality agent could ease the IP’s SIP16 compliance burden in a new way.
I’d summarise the SIP16 marketing essentials this way:
- The marketing strategy should be designed to achieve the best available outcome for creditors as a whole in all the circumstances.
- The business should be marketed as widely as possible proportionate to the nature and size of the business.
- Consideration should be given to the type of media used to reach the widest group of potential purchasers in the time available. Online communication should be included alongside other media by default.
- Marketing should be undertaken for an appropriate length of time to ensure that the best available outcome for creditors as a whole in all the circumstances has been achieved.
- Any previous marketing of the business by the Company is not justification in itself for avoiding further marketing. The adequacy and independence of the marketing should be considered in order to achieve the best available outcome.
Although much of the strategising is likely to be conducted in conversations in view of the urgency of the situation, SIP16 compliance requires good record-keeping. Could agents help IPs on this? Could they perhaps set out the “reasons underpinning the marketing and media strategy used” in a form that the IP could transfer readily to the SIP16 Statement? After all, an agent worth his salt will be familiar with the new SIP16 and will understand well the pre-pack tensions that need to be managed in order to get the best sale away. IPs look to their agents to propose and execute effective marketing strategies, so wouldn’t it follow that the agents fully justify their recommendations and actions in writing? Such a helpful service might also attract a premium rate or repeat instructions, mightn’t it?
Before I move away from the marketing topic, I’ve been asking myself: how can we decide if a valuation agent’s PII is “adequate”?
For starters, I suggest that IPs who do more than the occasional pre-pack set up central registers of the PII details of the agents that they use, rather than deal with this on a case-by-case basis. In this way, you need only ask your agents for PII information once and you can update your central register when the PII renewal dates come along.
Secondly, you might find RICS’ PII guidance useful: http://goo.gl/IAd7TX. This describes minimum terms for PII required by RICS in a style that will be familiar to all IPs.
Curly additions to SIP16
In the process of updating the CompAll SIP16 Statement template, I discovered that there were several sneaky additions to the new SIP16. I’ve attached at SIP16 comparison a tracked-changes comparison of the 2013 version and the current SIP16.
Some – but by no means all – of the lesser-publicised changes, which will affect standard documents and processes, are (in italics):
- IPs should make it clear that their role is not to advise either the directors or any parties connected with the purchaser.
- IPs should keep a detailed record of both the decision to do a pre-pack and all alternatives considered.
- If the Administrator has been unable to send his Proposals with the SIP16 Statement, the Proposals should include an explanation for the delay.
- Confirmation in the SIP16 Statement “that the sale price achieved was the best reasonably obtainable in all the circumstances” has been replaced by confirmation that the outcome achieved was the best available outcome for creditors as a whole in all the circumstances.
- Disclosure of the extent of the Administrator’s involvement pre-appointment has been extended to involvement of the Administrator’s firm and/or any associates.
- Disclosure of the alternative courses of action considered has been widened to the alternative options considered, both prior to and within formal insolvency by the IP and the company, and on appointment [of] the Administrator.
- Disclosure should include explanations of why no consultation took place with major – or representative – creditors; why no requests were made to potential funders; and why no security was taken for deferred security (including the basis for the decision that none was required), if any of these were the case.
- Disclosure of the names of directors/former directors involved in the management or ownership of the purchaser has been extended to include their associates and to any involvement in financing the purchasing entity.
- Disclosure of fixed/floating charge allocations of consideration needs to include the method by which the allocation was applied.
Although these SIP16 changes will make compliance staff’s (and consultants’) lives a little more unpleasant as we try hard to avoid SIP16 Statement slip-ups, I would welcome that extra bit of misery if the pay-off were the Holy Grail of “improved confidence”. I am yet to be convinced that this will be the outcome.