From 1 November 2015, administrators will have to satisfy more onerous marketing, valuation and disclosure requirements when implementing a pre-packaged sale of a distressed business.
Under Appendix 6 of the new Statement of Insolvency Practice 16 (SIP 16) lists the “marketing essentials” that administrators will now have to consider to ensure that the best possible consideration is received on a pre-pack sale. These include:
- Broadcast: wider marketing;
- Justify strategy: explaining the marketing and media strategy;
- Independence: being satisfied as to the adequacy and independence of marketing strategy (particularly where the business is marketed before the administrators appointment);
- Publicise: actively and for an appropriate length of time;
- Connectivity: including an online presence; and
- Comply or explain: where there is non-compliance this must be justified, particularly where the sale is to a connected party.
Administrators are also required to:
- Obtain an independent valuation of the business or provide a compelling explanation as to why and how he was satisfied as to the valuation of assets; and
- Deliver a report to creditors no later than 7 days following the pre-pack summarising the valuation and providing detailed information regarding the pre-pack transaction.
Connected party transactions
In addition to the requirements above, where the purchaser is a connected party, the following has been introduced:
- the concept of a pre-pack pool of independent business experts which purchasers are encouraged to approach; and
- a voluntary viability review stating how the purchasing entity will survive for at least 12 months.
The changes are designed to curb criticisms that pre-packs lack transparency and suffer from insufficient marketing.
Strict adherence to the new marketing rules may not always be possible where there is need for speed, confidentiality and continuity of business. That shouldn’t be a complete barrier to the use of the pre-pack administration process in those circumstances but it will be necessary to explain any lack of compliance.
Reference to the pre-pack pool is voluntary which means that transactions requiring the most scrutiny may not actually be brought before the panel. It is also unclear how the pool will work in practice.
Overall there are legitimate concerns that the new requirements may discourage the use of the process or have a negative impact on their effectiveness. A potential consequence may also be a shift to pre-pack liquidations which are not covered by such regulations.
If the changes do not improve the image of pre-packs to connected parties, there remains the ability for them to be banned altogether.
For more information on these changes or help or advice on pre-packs please contact Kelly Jordan on 0191 211 7899.