The consultation release explained that the SIP13 revision involved using “(wherever possible) language which is consistent with SIP16”. The resulting draft gives me the impression that the working group started with a blank sheet of paper and asked themselves: how can we adapt SIP16 for on-liquidation sales?
I agree that much of the current SIP13 is redundant, as it simply reproduces principles from the Code of Ethics (albeit that the Code rarely makes such direct applications), it does seem to me that the diversity of scenarios for connected party sales in and around insolvency processes has been lost in this redraft. This SIP’s primary focus clearly has become post-appointment connected party sales that are contemplated prior to appointment.
Why chop out so many connected party sales that are caught by the current SIP13? Will this improve perceptions? Will we lose valuable transparency if we assume that the only connected party transactions worthy of disclosure are quasi pre-packs?
Requirements on office holders
The only requirements that the draft revised SIP13 puts on IPs in office are:
- “If an office holder subsequently relies on a valuation or advice other than by an appropriate independent valuer and/or advisor with adequate professional indemnity insurance this should be disclosed along with the rationale for doing so and the reasons why the office holder was satisfied with any valuation obtained, explained.”
- “When considering the manner of disposal of the business or assets the office holder should be able to demonstrate that their duties under the legislation have been met.”
- “The office holder should demonstrate that they have acted with due regard to creditors’ interests by providing creditors with a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered. Such disclosure should be made in the next report to creditors after the transaction has been concluded, which should be issued at the earliest opportunity.”
Item 2 is pointless: a SIP should not have to state that IPs need to be able to demonstrate that they have complied with legislation.
The other two items are generally reasonable, but I think the application of these requirements is confused by the preceding section headed “Preparatory Work”. In fact, item 1 above appears in the “Preparatory Work” section, which adds to the perception that the entire SIP relates only to quasi pre-packs.
“Preparatory Work” – a confusing context
This section states:
“An insolvency practitioner should keep a detailed record of the reasoning behind both the decision to make a sale to a connected party and all alternatives considered.”
“An insolvency practitioner should exercise professional judgement in advising the client whether a formal valuation of any or all of the assets is necessary.”
The SIP’s “principles” explain that “insolvency practitioner” is to be read as relating to acting in advisory engagements prior to commencement of the insolvency process.
The “preparatory work” heading and the reference to the pre-appointment “decision to make a sale” lead me to wonder whether the sections that follow – “after appointment” and “disclosure” – apply only to sales where pre-appointment preparatory work has been undertaken. Another issue with the heading – and the fact that the first sentence above is a copy of para 10 of SIP16 (with the omission of “pre-pack”) – is that it suggests that SIP13 does not capture sales completed pre-appointment.
But does it make sense to reduce SIP13 to a SIP16 baby brother?
Does the SIP work for liquidation sales?
Often business and/or asset sales to connected parties are conducted in or around a CVL process. Sometimes the sale happens pre-liquidation: sometimes without the advising IP’s involvement, but sometimes with their knowledge and assistance. In other cases, the IP takes no steps to sell the assets until his/her formal appointment as liquidator; indeed, in some cases the IP will not even have met or spoken with the directors before the S98 meeting as they replace the members’ choice of IP as liquidator.
What are the disclosure requirements for pre-liquidation sales? This draft revised SIP13 omits all such disclosure. True, at present SIP8 requires some disclosure, but:
- SIP8 only requires disclosure of transactions in the year before the directors resolved to wind up the company, so there remains a crucial reporting gap;
- SIP8 only requires disclosure to the S98 meeting, so technically it need not be in the post-S98 report that is circulated to creditors; and
- SIP8 will be changed enormously by the 2016 Rules and rumour has it that SIP8 might even disappear completely.
How many companies go into CVL having sold/lost all their chattel assets already? I reviewed the filing of 10 one year old CVLs chosen at random:
- 6 had no chattel assets at the point of liquidation, although the previous accounts of 3 of these attributed some value to chattel assets (and one of the others had no filed accounts);
- 3 involved post-CVL connected party sales; and
- 1 involved a post-CVL unconnected party sale.
Of course, there can be all kinds of reasons why a company goes into CVL with no chattel assets, but if the revised SIP13 is issued, how many connected party transactions will go entirely unreported in future? Might it even influence more directors to dispose of assets before an insolvency office holder is appointed so that the sale falls under the radar?
Of course, the insolvency office holder will make appropriate investigations into a pre-liquidation (or any other insolvency process) sale. Therefore, is there really any harm done if the details of the sale are not provided to creditors?
I guess not, but doesn’t the omission de-value the efforts to ensure that office holders disclose post-appointment sales? What are the chances that the distinction between a pre and post sale will be lost on some creditors? If they see solely a cash at bank lump sum received by the liquidator of a once asset-rich company and few details, what might their sceptical minds conclude?
Not quite SIP16
As I mentioned at the start, this draft revised SIP13 seems to have been produced from a blank sheet of paper and a copy of SIP16. However, fortunately, this SIP seems to have avoided the prescriptive shackles of its fellow.
The consultation release referred to SIP13 having been drafted “in a proportionate way and without being onerous, recognising that it may apply to low value transactions”. Notwithstanding that some liquidation business/asset sales may be as hefty as some pre-packs, I think this is good news: the draft SIP13 does not contain a SIP16-style shopping list of disclosure items (bravo!) and sticks to the principle of providing “a proportionate and sufficiently detailed justification of why a sale to a connected party was undertaken, including the alternatives considered”.
Therefore, whilst I suspect that disclosure of material business sales may be expected to contain a number of SIP16 elements, at least selling an old computer to the director for £50 will not require a chapter-and-verse account. However, it will take diligence on the part of those drafting and reviewing creditors’ reports to ensure that an adequate explanation, depending on the specific circumstances, is given. As with the new SIP9, formulaic approaches to report-writing will not work.
Assuming that the pre-appointment “preparatory work” context is not meant to rule out disclosure of cold post-appointment sales, the draft revised SIP13 would have a wider reach than the current SIP13 in some respects:
- Sales with connected parties (or at least as they are defined by statute), not just with directors, are caught; and
- Personal insolvency processes are caught, so for example it would include a bankrupt’s family member buying out the Trustee’s interest.
I agree that a revision of SIP13 is long overdue: for one thing, its reference to a Rule 2.2 report lost all relevance in 2003!
The consultation – available at http://goo.gl/D91QMo – ends on 11 May 2016. I’ll be submitting a response, so if you want to counter my opinions, you’d better getting writing.
By the way, if you’ve been wondering how the picture relates to the story: there’s no connection, it’s just that I’ve recently returned from a spectacular trip to Bolivia and Chile.