Many of you will have noticed the recent publicity about the closure of 8 companies by the Secretary of State on public interest grounds. One of these was last year and involved a company that essentially found companies in distress and parachuted in its own directors to guide the company into liquidation, allegedly using a malleable IP to smooth the process and allow the old directors to buy back the remaining assets without too much due diligence. More recently, a group of companies connected to a man with a colourful history in the profession has been using marketing techniques that involved criticising the profession and suggesting the directors were better using them and “their” panel of IPs to restructure via a pre-pack administration. Early examples of this that we saw involved companies moving from CVA to administration without giving notice to the unsuspecting supervisor. Call us naive, but we did not realise that the IPs involved were paying to receive the group’s referrals, as indicated in the Insolvency Service’s press release. As many as six IPs may be facing regulatory attention. We wonder whether the solicitors that acted in the appointments will be allowed to get off without scrutiny, but that is not what this article is about.
The common theme between these two operations is that the directors were given the impression that they were entitled to the remaining assets and that any proposed sale was a “done deal” at their price, with little or no check on asset values or marketing outside the connected parties.
As a result of all of the above attention, there is considerable regulatory concern that IPs should not be seen to be selling assets to connected parties without checking that they are getting the best deal possible with appropriate valuations and marketing. We are already aware that one regulator intends to collect details of a sample of connected party sales conducted by its practitioners. They will be asking for details of the number of cases, the referral sources, the assets sold, the value obtained, the valuer used and the IP’s fees, and they will analyse them to see if there is a correlation. Any IP doing all of his connected sales through a single referral source for pretty much the same value, agreed by the same valuer and correlating closely to his fees, can expect to be asked more questions and possibly face a targeted visit.
Underpinning all of this is a requirement in SIP 13, which is old and on the table for revision, but currently says, at paragraph 5.2, “…unless sale by auction is the chosen means of disposal, [the IP should] take steps to advertise assets for sale or circularise (for example, by use of mailing lists) known prospective interested parties.” Even when the SIP is revised, it is likely to require the sort of valuation and marketing principles required under SIP 16.
So, to avoid attracting a lot of regulatory attention, you should identify any potential connected party sales at an early stage and ensure that you comply fully with SIP 13. Make sure that any meeting or engagement terms clearly set out that there is no certainty that the assets will be sold to the connected party and that you must conduct appropriate valuations and marketing. Ensure that any valuation is a genuine valuation of inventoried assets by an appropriate agent, not just a rushed desktop approval of the connected parties offer by the same valuer every time. Take reasonable steps to market the assets, using your agents’ contact lists or one of the online auction sites to gauge any interest in the assets outside the connected parties. Finally, record the steps that you have taken and confirm that you are happy that you have done everything reasonable before you agree any sale, making as much disclosure as you can, say in the S98 meeting notices or at the meeting itself, so that you can show that you have been completely transparent in your dealings.
Marketing should be done as a matter of routine, as without testing the market you cannot tell if you have achieved the best price for the business or assets. If, however as an exceptional matter, you decide that marketing is not appropriate in the circumstances of the case, then to protect yourself you should both file note the reasons for that decision and make disclosure to the creditors.
Unfortunately, the inappropriate behaviour of a few individuals has again tarnished the reputation of the whole profession, but I take comfort that despite the delay, the companies have now been wound up and the culprits are on the way to being dealt with. We don’t blame the regulators for looking more closely at this area in the light of those cases and we can only appeal to you to give SIP 13 your special attention while the focus is on connected party transactions.
