The new draft legislation requiring an evaluator\u2019s opinion on connected pre-packs has drawn most attention.\u00a0 But the measures will affect more than just connected pre-packs and the Insolvency Service\u2019s report reveals other planned efforts to influence IPs\u2019 activities and disclosures.<\/p>\n
In this article, I focus on the less-publicised changes that are afoot, including:<\/p>\n
The Insolvency Service\u2019s Pre-Pack Sales in Administration Report and the draft regulations are at: https:\/\/www.gov.uk\/government\/publications\/pre-pack-sales-in-administration<\/a>.<\/p>\n <\/p>\n The draft regulations are not about pre-packs<\/u><\/strong><\/p>\n No, really, they\u2019re not.\u00a0 The draft regulations impose new requirements on:<\/p>\n <\/p>\n Why interfere with post-appointment sales?<\/u><\/strong><\/p>\n The Insolvency Service\u2019s report does not explain or seek to justify this step.\u00a0 It seems to suggest that, because the SBEE Act\u2019s power to legislate extended to all connected party sales, they were free to regulate all such sales.\u00a0 However, they have graciously decided \u201conly\u201d to apply the requirements to sales within 8 weeks of the start of the Administration.<\/p>\n So\u2026 a secured lender appoints Administrators perhaps in a hostile manner.\u00a0 The Administrators have had no contact with the director before their appointment, but they soon learn that the director is anxious to hold onto the business so will offer almost anything.\u00a0 The Administrators are keen to recover as much as possible for their appointor and, as is their statutory duty, to care also for other creditors\u2019 interests, so they play hard ball to squeeze out the best deal.\u00a0 The Administrators\u2019 agents recommend that they snap up the offer \u2013 maybe they\u2019ve now carried out some marketing, maybe it\u2019s a no brainer that no unconnected party in their right mind would offer anything approaching the director\u2019s offer \u2013 the secured lender is happy with it, and the Administrators make sure that the purchaser is good for the money.\u00a0 But still <\/em>the purchaser must instruct an independent evaluator?<\/p>\n <\/p>\n What will the evaluator evaluate?<\/u><\/strong><\/p>\n The evaluator\u2019s report must state whether or not they are:<\/p>\n \u201csatisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances\u201d.<\/p><\/blockquote>\n It seems to me that the people best-placed to evaluate whether the consideration is reasonable are professional agents, aren\u2019t they?\u00a0 Shame that independent, qualified, PII\u2019d agents instructed by the Administrators to do just that cannot be trusted with this task, isn\u2019t it?<\/p>\n How does someone assess whether \u201cthe grounds for the substantial disposal\u201d are reasonable?\u00a0 It\u2019s not \u201cthe grounds for Administration\u201d, so this will not address the cynics\u2019 belief that directors engineer companies into Administration to \u201cdump debts\u201d and start again.\u00a0 I\u2019m not saying this happens often, if at all.\u00a0 Unnecessarily putting yourself through an Administration and then battling to restore, or to build new, trust of suppliers, employees, and customers seems a drastic step to take.\u00a0 I think that many connected purchasers underestimate the struggles ahead of them.<\/p>\n Presumably, \u201cthe grounds for the substantial disposal\u201d relates to the question: could a better price be achieved by a different strategy?\u00a0 This sounds like a debate about the marketing strategy, the prospects of alternative offers, and going concern v break-up, so again professional and experienced agents seem best-placed to make this evaluation.<\/p>\n <\/p>\n But why not just ask the Pool?<\/u><\/strong><\/p>\n I understand the noises of: what\u2019s wrong with simply asking the Pre-Pack Pool?\u00a0 But I return to the question: why have an opinion in the first place?\u00a0 It won\u2019t dispel the suspicions that the whole thing has been designed by the directors who shouldn\u2019t be allowed to use Administration or Liquidation and it won\u2019t answer the many who just believe that it\u2019s wrong for a director to be allowed to buy the business or assets from an Administrator or Liquidator.\u00a0 The public comments below The Times\u2019 articles on pre-packs say it clearly: some people call connected party sales (and CVAs) \u201cfraud\u201d or \u201clegal theft\u201d.\u00a0 How do you persuade these people to see things differently?<\/p>\n The strongest argument I could find in the Insolvency Service report for a Pool opinion was:<\/p>\n \u201cWhilst some stakeholders said that an opinion from the Pool (or lack of one) would not affect their decision to trade with a business that was sold to a connected party purchaser, other creditor groups said that their members valued the Pool\u2019s decision, and that the opinion did influence their decision as to whether to trade with the new company.\u00a0 They also stated that where the Pool had been utilised, the opinion given helped to demonstrate to creditors that in some circumstances a sale to a connected party provided a reasonable outcome for creditors\u201d.<\/p><\/blockquote>\n So some say it helps, some say it doesn\u2019t.<\/p>\n Somehow the Insolvency Service concluded that their \u201creview has found that some connected party pre-packs are still a cause for concern for those affected by them and there is still the perception that they are not always in the best interests of creditors\u201d, but I saw nowhere in the report where those perceptions originate.\u00a0 The report referred to the media and the CIG Bill Parliamentary debates.\u00a0 Is that your evidence?\u00a0 Oh yes, some Parliamentarians have been very colourful in their descriptions of pre-packs; one said that the directors offer \u201ca nominal sum \u2013 maybe only \u00a31 or a similarly trivial sum\u201d.\u00a0 Their ignorance \u2013 or the way they have been misled to believe this stuff \u2013 is shameful and on the back of such statements, distrust of connected party pre-packs grows and so the case for an independent opinion is made.<\/p>\n And now the R3 President is reported as saying that \u201ceffectively anyone will be allowed to provide an independent opinion on a connected party pre-pack sale, which risks abuse of the system that undermines the entire rationale of these reforms\u201d.\u00a0 Again, we feed the beast that bellows that IPs \u2013 and professional agents \u2013 cannot be trusted.<\/p>\n So, ok, if it makes you happy, fine, let it be a Pre-Pack Pool opinion.\u00a0 In my view, they have fallen far short of justifying their existence, but if it shuts the mouths of some who see pre-packs as \u201cFrankenstein monsters\u201d (The Times) or at least gives them pause, then so be it.<\/p>\n <\/p>\n Getting creditors\u2019 approval as an alternative<\/u><\/strong><\/p>\n The draft regulations provide that, as an alternative to getting an evaluator\u2019s opinion, a substantial disposal to a connected party may be completed if:<\/p>\n \u201cthe administrator seeks a decision from the company\u2019s creditors under paragraph 51(1) or paragraph 52(2) of Schedule B1 and the creditors approve the administrator\u2019s proposals without modification, or with modification to which the administrator consents\u201d<\/p><\/blockquote>\n This must be achieved before <\/em>the substantial disposal is made, so it will not be available for pre-packs\u2026 unless you can drag out the deal for 14+ days.<\/p>\n Could it help for post-appointment business sales?\u00a0 Provided that you don\u2019t make a Para 52(1)(a), (b) or (c) statement in your proposals, it might.\u00a0 And let\u2019s face it, if you\u2019re issuing proposals immediately on appointment and before you\u2019ve sold the business and assets, you may be hard pressed to make any<\/em> positive statement about the outcome of the Administration.<\/p>\n But if you issue proposals immediately, i.e. before you have negotiated a potential deal with anyone, what exactly would the creditors be approving?\u00a0 Presumably, they would be informed of your strategy to market the business and assets and shake out the best deal from that.\u00a0 They would not be informed of what offers (if any) are on the table and it would be commercial suicide for the proposals to include valuations.\u00a0 Would such vague proposals achieve what the Insolvency Service is expecting from this statutory provision?<\/p>\n Could it be that the Service recognises that true post-appointment connected party sales (i.e. not those that avoid the pre-pack label by resisting negotiation until a minute past appointment) do not require independent scrutiny and this is their way of avoiding putting them all in that basket?<\/p>\n <\/p>\n Smartening up on SIP16 statement compliance<\/u><\/strong><\/p>\n The Insolvency Service reports that SIP16 statement compliance has improved: since the RPBs took on monitoring compliance in late 2015, the annual non-compliance rate has dropped from 38% to 23%.\u00a0 The report states, however, that:<\/p>\n \u201cthe level of non-compliance continues to be a concern, as SIP16 reporting is a key factor in ensuring transparency and maintaining stakeholder confidence in pre-pack sales\u201d<\/p><\/blockquote>\n Hang on, when did SIP16 require a \u201creport\u201d?\u00a0 The Insolvency Service refers throughout to a SIP16 report.\u00a0 It\u2019s funny, isn\u2019t it, how something that started off as \u201cdisclosure\u201d, then became a \u201cstatement\u201d, and now is considered a \u201creport\u201d?\u00a0 I think this demonstrates how the SIP16 disclosure requirements have grown legs.\u00a0 And, while the report acknowledges that the RPBs state that most of the non-compliances are \u201cminor technical breaches\u201d and that there is \u201cnow more information available to creditors as a result of the SIP16 changes\u201d, it seems to suggest that stakeholder confidence can only be enhanced if we eliminate even those minor breaches.<\/p>\n The report focuses on three areas where it seems that \u201cgreater consistency needs to be promoted across the profession\u201d: viability statements, marketing activity and valuations.<\/p>\n <\/p>\n The value of viability statements<\/u><\/strong><\/p>\n The report indicated that, of the 2016 connected party SIP16 statements reviewed, 28% of them \u201cstated viability reviews\/cash flow forecasts had been provided\u201d.\u00a0 69% of the purchasers in these cases were still trading 12 months later.\u00a0 However, in the category of cases where no viability statements were evidenced, 87% of those purchasers were still trading after 12 months.\u00a0 This suggests to me that disclosure of a viability statement does not particularly help Newco to gain trust with creditors!<\/p>\n Of course, rightly so the report states that the purchasers may well have carried out their own viability work but have been unwilling to share it.\u00a0 What I was far less pleased about was that the report stated that \u201calternatively, it may be that the insolvency practitioner\u2026 is not requesting the purchaser to provide a viability statement, which would indicate non-compliance with the requirements of SIP16\u201d.\u00a0 The cheek of it!\u00a0 If a progress report omitted the date that creditors had approved an office holder\u2019s fees, would the Service suspect that this was because it never happened?\u00a0 Actually, I can believe that they would.\u00a0 The Insolvency Service has no evidence of non-compliance in this regard, but they can\u2019t help but stick the boot in and foment doubts over IPs\u2019 professionalism and competence.<\/p>\n Having said that, IPs would do well to double-check that they are <\/em>asking for viability statements and making sure that there\u2019s evidence of requests on the file, don\u2019t you think..?<\/p>\n I wonder whether a future change will be that the RPBs will ask to be sent, not only the SIP16 statement, but also evidence of having asked the purchaser for a viability statement.<\/p>\n The report\u2019s conclusion is puzzling:<\/p>\n \u201cIn discussions with stakeholders no concerns were raised regarding the lack of viability statements. However, the government considers that there continue to be benefits to completing viability statements for the reasons highlighted in the Graham Review. Therefore, we will work with stakeholders to encourage greater use.\u201d<\/p><\/blockquote>\n Hmm\u2026 so no one seems bothered about their absence, but the government wants to see more of them.\u00a0 Logical.<\/p>\n <\/p>\n Compliance with the SIP16 marketing essentials<\/u><\/strong><\/p>\n The review sought to analyse 2016 connected party SIP16 statements as regards explaining compliance with the six principles of marketing set out in the SIP.\u00a0 The report states:<\/p>\n \u201cthe principles that encourage exposure of the business to the market \u2018publicised\u2019 (54% compliance), \u2018broadcast\u2019 (53% compliance) and \u2018marketed online\u2019 (56% compliance) have only been complied with in just over 50% of cases.\u201d<\/p><\/blockquote>\n Given that they were reviewing only the SIP16 statements, I\u2019m not sure they can say that the marketing principles have not been complied with.\u00a0 Might it just be that the IPs failed to explain<\/em> compliance in the SIP16 statement?<\/p>\n Having said that, the review also revealed that, \u201cof those that deviated from the marketing principles, over 80% of administrators provided justification for their marketing strategy\u201d, i.e. they complied with the SIP16 \u201ccomply or explain\u201d principle.\u00a0 This suggests to me that 20% of that c.50% need to try harder to get their SIP16 statements complete.<\/p>\n <\/p>\n The value of marketing<\/u><\/strong><\/p>\n The report acknowledges that \u201cin some limited cases it may be acceptable for no marketing\u2026 to be undertaken\u201d.\u00a0 I think that many would go further than this: in some limited cases, it may be advantageous<\/em> not to market.\u00a0 The review stated that no marketing had been carried out in 21% of the 2016 connected pre-packs reviewed.\u00a0 This does seem high to me and I think does not help counteract suspicions of undervalue selling.<\/p>\n Interestingly, though, where marketing was undertaken, 46% of those connected party sales were below the valuation.\u00a0 But where marketing was not undertaken, 43% were below \u201cthe valuation figure\u201d.\u00a0 As most IPs get valuations on both going concern\/in situ and forced sale bases, I\u2019m not sure which \u201cfigure\u201d the Service is measuring against here.\u00a0 But nevertheless perhaps this is some comfort that marketing doesn\u2019t make a whole lot of difference\u2026 unless of course it attracted an independent purchaser, which would have taken the case outside the scope of the Service\u2019s review entirely.\u00a0 Shame that they didn\u2019t analyse any unconnected SIP16s!<\/p>\n <\/p>\n The compliance problem<\/u><\/strong><\/p>\n The government\u2019s response to the diversity in approach to marketing and to SIP16 disclosure includes that they will:<\/p>\n \u201cwork with the regulators to ensure: there is greater adherence to the principles of marketing\u201d; and \u201cthere is a continued increase in compliance with the reporting requirements under SIP16\u201d.<\/p><\/blockquote>\n As I mentioned above, the report stated that SIP16 statement non-compliance was at 23% in 2019\u2026 but in her recent virtual roadshow presentation, Alison Morgan of the ICAEW stated that their IPs\u2019 2019\/2020 rate was at c.50%.\u00a0 We must do better, mustn\u2019t we?!<\/p>\n I too am frustrated about the levels of compliance with SIP16.\u00a0 I realise it\u2019s a killer of a SIP \u2013 some of the requirements don\u2019t follow chronologically or logically and some leave you wondering what you\u2019re being asked to disclose.\u00a0 I realise that almost no pre-packs fit neatly into the from-a-to-b SIP16 ticksheet.\u00a0 But I don\u2019t know when I last saw a 100% fully compliant SIP16 disclosure! \u00a0I know I\u2019m harsh, harsher it seems that some of the RPB reviewers, but whatever SIP16 asks for, please just write it down\u2026 and tell your staff not to mess with templates \u2013 they\/you may think that some statements are pointless or blindingly obvious, but please just leave it in.<\/p>\n <\/p>\n Expect to be \u201cprobed\u201d!<\/u><\/strong><\/p>\n Another part of the government\u2019s response is to:<\/p>\n \u201censure that where no marketing has been undertaken, the explanation provided by the administrator is probed by the regulator where necessary\u201d.<\/p><\/blockquote>\n True, SIP16 allows for a \u201ccomply or explain\u201d approach, but if a large proportion of businesses are not being marketed, it just opens us up to the cheap shot that the sale might have been at an undervalue, doesn\u2019t it?<\/p>\n What is a valid reason for not marketing?\u00a0 Again in her recent presentation, Alison Morgan indicated that a fear of employees walking out or of a competitor stealing the business may not in themselves be sufficient justification.<\/p>\n <\/p>\n SIP16 changes in prospect<\/u><\/strong><\/p>\n So what changes will we see in SIP16?\u00a0 The government response is that they:<\/p>\n \u201cwill work with the industry and the RPBs to prepare guidance to accompany the regulations and to ensure SIP16 is compatible with the legislation.\u201d<\/p><\/blockquote>\n Guidance?\u00a0 Sigh!\u00a0 If it\u2019s anything like the moratorium guidance, then I don\u2019t see why they bother: what more can they say apart from regurgitate the regulations, which are only 6 pages long?<\/p>\n And how is SIP16 incompatible with the regulations?\u00a0 Well, obviously in referring specifically to getting an opinion from the Pre-Pack Pool\u2026 but I wonder how the regulations will look when they\u2019re finalised.\u00a0 With all the murmurings about almost anyone being able to call themselves an evaluator, I suspect it may be the regulations that will be brought more into line with SIP16 on this point!<\/p>\n But let\u2019s hope that SIP16 is not changed to accommodate the regulations\u2019 capture of all <\/em>connected party Administration business\/\u201dsubstantial\u201d asset sales within the first 8 weeks.\u00a0 That truly would be sledgehammer-nut territory, wouldn\u2019t it?<\/p>\n The government has also threatened to:<\/p>\n \u201clook to strengthen the existing regulatory requirements in SIP 16 to improve the quality of information provided to creditors\u201d.<\/p><\/blockquote>\n \u201cStrengthen\u201d the requirements?\u00a0 I wonder what they have in mind\u2026<\/p>\n <\/p>\n What about valuations?<\/u><\/strong><\/p>\n Oh yes, I forgot: that was the third area the government highlighted for greater consistency.<\/p>\n Right, well, they weren\u2019t happy that 18% of the SIP16s they reviewed failed to state whether the valuer had PII.\u00a0 I don\u2019t know what they think IPs do, have a chat with a guy in a pub?\u00a0 So, yes, we need to check that our SIP16 ticksheets are working on that point.<\/p>\n The report also noted that some SIP16s didn\u2019t have enough information to compare valuations to the purchase price, although they didn\u2019t make a big deal of it.\u00a0 In her recent roadshow presentation, Alison Morgan repeated her request that IPs produce SIP16s that neatly detail the valuations per asset category alongside<\/em> the price paid.\u00a0 (You\u2019ll have gathered that Alison had a lot to say about SIP16 compliance \u2013 I recommend her presentation!)\u00a0 Although I share Alison\u2019s view, working through the SIP\u2019s requirements in the order listed is not conducive to presenting the valuation figures alongside the sale price, so this is definitely a SIP16 area that I think could be usefully changed.<\/p>\n <\/p>\n What if SIP16 compliance does not improve?<\/u><\/strong><\/p>\n Ooh, the government is waving its stick about here:<\/p>\n \u201cShould these non-legislative measures be unsuccessful in improving regulatory compliance, the quality of the information provided to creditors and the transparency of pre-pack sales in administration, government will consider whether supplementary legislative changes are necessary.\u201d<\/p><\/blockquote>\n SIPs have pretty-much the same degree of clout as legislation.\u00a0 In the case of SIP16, arguably it carries a greater threat.\u00a0 There have been several RPB reprimands for SIP16 breaches published over recent years.\u00a0 How many court applications does the government think will result if they enshrine SIP16 in legislation?\u00a0 More than the number of RPB reprimands?\u00a0 If IPs are failing to comply with SIP16, it\u2019s not because the SIP is toothless.<\/p>\n <\/p>\n Will the measures solve the pre-pack \u201cproblem\u201d?<\/u><\/strong><\/p>\n In my view, no.\u00a0 There is just too much general cynicism about IPs being in cahoots with directors and about directors being determined to stiff their creditors.<\/p>\n What I think might <\/em>help a little is if our regulators \u2013 the Insolvency Service and the RPBs \u2013 reported a balanced perspective of SIP16 compliance.\u00a0 I know that the report acknowledges that most SIP16 disclosure breaches are \u201cminor technical\u201d ones, but the simple stats grab the headline.\u00a0 We also need a simpler <\/em>SIP16 so that compliance is easier to achieve and to measure.\u00a0 Concentrating on the minutiae and concluding that the statement is non-compliant just does not help.\u00a0 Are the minutiae really necessary?\u00a0 Does it improve the \u201cquality\u201d of the information and the transparency of the sale?\u00a0 I know, I know, the SIP isn\u2019t going to get any simpler, is it?<\/p>\n I think the regulators might also help if they were to defend themselves and in so doing defend IPs as a whole.\u00a0 <\/em>Do they not realise that the perceptions that pre-packs are not in creditors\u2019 best interests is also a slight on how they may be failing to regulate IPs effectively?\u00a0 No one na\u00efvely claims that all IPs are ethical and professional, so what steps have the RPBs taken to tackle the actual, suspected or alleged abusers of the process?\u00a0 If they have identified them and are dealing with them, then can they not publicise that fact and confirm that the rest of the IP population are doing the right thing?\u00a0 Instead, all we hear especially from the Insolvency Service is that, while pre-packs are a useful tool, IPs do a poor job of acting transparently and that there needs to be an independent eye scrutinising the proposed deal to give creditors confidence.\u00a0 Are not the regulators the policemen in this picture?<\/p>\n","protected":false},"excerpt":{"rendered":" The new draft legislation requiring an evaluator\u2019s opinion on connected pre-packs has drawn most attention.\u00a0 But the measures will affect more than just connected pre-packs and the Insolvency Service\u2019s report reveals other planned efforts to influence IPs\u2019 activities and disclosures. … Continue reading \n