Friday, May 04, 2012

Some thoughts on Pre-packs and SIP 16

Here are some notes about SIP 16 that I provided to delegates at the recent R3 SPG Technical Reviews in Manchester, Birmingham and London.  They are very much my speculative thoughts, but I thought you might like to mull them over in a quiet moment.

So…a politician changed his mind.  I am not sure that should be a particularly huge surprise to anyone and it would probably be more of a surprise if the position remained unchanged until you read these notes.  Davey has departed and Lamb has yet to feature on the menu (sorry!), so I get the chance to ruminate on whether change is needed, what any change that is needed could be and whether, in the grand scheme of things, it will make any difference.

Far be it from me to belittle our profession, but I think that we are sometimes given more credit for chaos than we really deserve.  It would appear from the moaning arising from lobbyists and credit insurers that it is the IP who is personally responsible for them losing money.  This overlooks the fact that they made poor credit risk decisions in an extended boom market based on incomplete and unreliable information and then continued to lend to shore up untenable positions while secured lenders protected themselves by taking a charge over the kitchen sink .  It may be galling to them to see directors set up afresh after abandoning their debts, but in the absence of a decent debtors’ prison policy and with public floggings being so pass√© we have to accept that IPs will do what they perceive to be best for the body of creditors in a given situation.  Over the last 10 years banks and asset based lenders have become much more effective at covering their positions with the result that many insolvencies now have few unsecured assets of any realisable value left.  This usually leaves the IP with a fairly simple choice between a burial liquidation with negligible realisations and a more rescue-focused administration with enhanced realisations and, often, preserved job and future prospects for a wide range of staff and suppliers.  Under the circumstances, it is a bit harsh to criticise the professional for taking the higher offer just because it is from the old management and creditors have not been told about it beforehand.

The perception within the profession is that the perception outside the profession is that all IPs are bad and intent on abusing the pre-pack process.  In reality, a small minority of vocal interests and a few influential politicians believe that all IPs are the same as a couple of bad apples that the regulators have failed to root out to date.  I have a degree of faith in our regulatory system to catch up with the bad boys sooner or later, but from what I have seen when dealing with complaints, the internal and external perception is often very different from how the appointment taking IP sees it in the heat of the moment.  Some of those who constantly moan about rogues in the profession could do worse that realise that a badly drafted report or, worse still, taking a case off you off the floor that you thought was in the bag, does not make an IP a bad IP or rogue.  Every time an IP alleges weakness in the system, he undermines the work that R3 and others do on our behalf to raise the profession’s profile and emphasise how effectively it is regulated.

So, even though change may well not be needed, the vocal minority have probably done enough that something will have to be done and with the coalition government firmly committed to blocking new regulation for micro-businesses, which includes a lot of IP businesses, it appears that SIP 16 will come back into the spotlight.  I have tried to have a guess at what changes we might see, although it should be made clear that these are just my guesses, are not backed by any inside knowledge and could be complete hogwash. I have started by assuming that the SIPs will remain under the control of the profession.  It is not beyond the realms of possibility that if the Service stops regulating IPs directly and redefines its position as regulator of regulators we could see new binding guidance from them which could replace SIPs, or at least those where the Service perceives that there is a higher level of public interest.  If you consider the impact of Dear IP 42 which did not have that enhanced status and is not supposed to be binding, how much more interesting could life be with binding non-statutory guidance from the Service?

So assuming that SIPs stay with us, I would not be surprised if a new SIP 16 proposed catching all related party transactions in a new super-SIP to replace SIPs 16 and 13.  I would expect it to cover CVLs as well as ADMs and I don’t think that we have seen the last of the idea of some form of notice to unsecured creditors if the business is not marketed.  I think that we can expect to see the principles more clearly stated, but with the detail expounded in Dear IP 42 repeated within the SIP so that there can be no doubt that you have to get it right.   What I hope for, and I realise that you have to be careful what you wish for, is a clearer statement about what a pre-pack is.  I suspect, however, that the definition may just be widened so that the SIP applies to all pre-existing deals, even if the pre-existing element was only an expression of interest and that all related party transactions will be caught, whether pre-existing or not and whenever they complete.

The bit that caused the greatest debate in the abandoned legislation was the idea that unsecured creditors would have to be notified a set period before any appointment if the business was not being marketed.  Although opposition in the profession was vocal, it is noticeable that the reason given for abandoning the legislation was the government policy of avoiding new regulation and if the Service are looking for a new way to appease the more vocal creditor lobby, it is quite possible that some sort of “market or give notice” provision could be included in any new SIP.  Unless marketing is clearly defined in the SIP, I think that most IPs who are looking at a pre-pack ADM will simply market as they do in most cases already: an advert for an unnamed business in local or trade press; a quick email check with their own contacts in a similar business; and getting their agents to put feelers out to their clients in relevant sectors. Where the IP is looking at a pre-pack CVL, if the new SIP defines such an animal and tries to regulate it, I would expect most to avoid the marketing by giving notice of the proposed sale in the covering letter sent with the S98 meeting notices.

So, if SIPs remain and if SIP 16 is revised and if SIP 13 is included in it and if it is expanded to include CVLs and increase the number of transactions that could be termed as pre-packs, the changes to what an IP already does should be fairly minimal.  Equally, the changes would not, in my opinion, change creditor attitudes because I think that they are complaining to compensate for their own deficiencies and tweaking IP disclosure will not hide that fact that they lost their money.  If SIPs were subject to coalition government policy, they would not be changed at all because the marginal “public” benefit (I emphasise “public” because it is a noisy but pretty small portion of the public that wants change) would not outweigh the inconvenience and cost of changing the SIP in the first place. Unfortunately, SIPs are not subject to such a common sense limit and with a few creditors screaming and the Service looking for areas to exert its influence, I suspect that one or two of my guesses may turn out right for once.