Unless you have been out of the insolvency profession for a while you must have noticed that the long awaited revision of SIP 16 has now been published and will be effective from 1 November. We believe that this is a very positive development, if not exactly radical. As ever though, it has to be tinged with the recognition that there is nothing that the profession will ever do that can persuade those who have their hats set against any sort of related party transaction in particular, that pre-packs are anything but an abomination.
To put the changes to SIP 16 into context, it is worth remembering why it needed changing at all. When the SIP was first issued it was the first one for many years to be designed from scratch, and errors were made. The principles that were supposed to underpin an IP’s approach and disclosure were buried in the main text of the SIP and by far the longest section in the SIP was given over to what appeared to be a disclosure tick-sheet. As a result, IPs understandably, and almost inevitably given the implications of that format, placed more emphasis on commenting on each of those points, often using them like a list of frequently asked questions. The Insolvency Service was not happy with that approach and, prompted by some vocal stakeholders, came up with Dear IP 42. That added further commentary to how the SIP should be approached and expanded on some of the original tick points to show that a narrow approach to each one was not appropriate. However, there has always been some tension between the profession and its regulators and the Insolvency Service over the status of Dear IP 42 given that Dear IP has historically only been seen as a source of “good practice” as opposed to the “required practice” of a SIP. Clearly it makes sense, nearly 5 years on and with the benefit of hindsight, to re-draft the SIP and clarify key areas.
At the end of this article we will try to sum up the changes, but for now we will work through the SIP as it is published. The introduction includes an unchanged description of a “pre-packaged sale”, but then switches from the old SIP’s emphasis on the need to keep detailed records. Instead, the reader’s attention is immediately drawn to the prime importance of clear and transparent disclosure. IPs take note! It is not enough for you to have a record of what you have done and why you have done it. Paragraph 4 makes it clear that you have to explain it clearly so that everyone else can understand as well.
The first change in the SIP that we see as a really positive development is that the principles have been re-written and moved from their old position buried in the later paragraphs and given prominence in a new early section clearly entitled, “Principles”. IPs cannot fail to recognise that these are the messages that underpin the whole SIP and should be the main guide when preparing any sort of disclosure. Someone has tried to keep it as simple as possible. As a result, IPs are just told to keep their changing roles separate and explain them to creditors by providing a “detailed explanation and justification” of why the sale was undertaken, emphasising that the administrator has to be able to show that they have acted with due regard for the creditors’ interests.
After that, the SIP takes the approach that has worked so well in other recent SIP re-writes, with several paragraphs that set out the Key Compliance Standards. These are in three sections and although they have been shuffled around a little they do not differ greatly from the old requirements. The first section deals with preparatory work and emphasises the IP’s role, their duty to creditors, and the need to keep detailed records. The second section is almost brilliant in its simplicity: “…an insolvency practitioner should be able to demonstrate that the duties of an administrator under the legislation have been considered”. We think that they have just written a SIP that says “Do what you are required to do”!
The rest of the SIP is dedicated to the disclosure required by the key principle stated at paragraph 4, and it is here that the main changes arise. This SIP is designed to make Dear IP 42 redundant and the Insolvency Service has announced that it will be withdrawn when the SIP becomes effective, so the new wording aims to combine the old requirements with the additional suggestions from Dear IP 42. IPs are required to provide creditors with a “detailed narrative explanation and justification” confirming the statutory purpose pursued, that the transaction will help achieve it, and that the sale price was “the best reasonably obtainable in all the circumstances”. This recognises that sometimes the best price may not be that offered by the highest bidder, and that other factors may have to be taken into account. Factors such as the availability and timing of any sale consideration, liabilities avoided under differing offers (e.g. where one offer is a break-up, but the other includes continued trading and savings under TUPE), the availability of alternative funding, etc. The SIP makes it clear that commercial confidentiality is unlikely to outweigh the disclosure requirement if the sale involves a connected party.
The requirements around the timing of any disclosure have been clarified. Note that this is really a re-statement of the requirement and not a “new deadline” as we have heard some commentators suggest. The explanation should be given, as before, in the first notification to creditors. The legislation requires you to issue that notification “as soon as reasonably practicable” after appointment, but the new SIP clarifies this by saying that the disclosure should take place “in any event within 7 calendar days”. The explanation has to be copied to Companies House. Any departure from the requirement to issue it early has to be supported by a “reasonable explanation”. We think that is just a different way of re-stating the requirement to provide the information “as soon as reasonably practicable”. Note though that the statutory requirement to notify creditors of your appointment “as soon as reasonably practicable” would still take priority, so you should not delay giving notice to creditors just because you are unable to make the SIP 16 disclosure within the 7 calendar day timescale.
The SIP states that the proposals should be issued as soon as reasonably practicable after appointment, which is the statutory requirement. It seems strange that it needed repeating, but stranger still that it was not thought necessary to provide some guidance on that requirement if the initial explanation was clarified as “within 7 calendar days”. Following the logic shown there, if “as soon as reasonably practicable” means “in any event within 7 days”, we think that IPs should try to issue the proposals within a further 7 days. i.e. within 14 days of the appointment.
Departing from the commentary on the SIP for a moment, we suggest that IPs adopt an approach that we have seen several clients use successfully. Instead of issuing notification of appointment to creditors, then a separate notification with the SIP disclosure, then separate proposals, why not try drafting the proposals as the appointment is being planned and negotiations are taking place, so that you can issue them on appointment? That would allow you to issue one notice instead of two, or potentially three, meet the deadlines in both the legislation and the SIP and help give some structure to your pre-appointment enquiries and efforts. The time costs of preparing the proposals pre-appointment would form part of your pre-administration costs and so would need to be disclosed and explained in the proposals. Justification for this work being done pre-appointment and explaining how it furthered the purpose of the administration could, for instance, be that it enabled disclosure about the pre-pack to made more quickly to the creditors and at the same time as the notification of appointment, such that it reduced the administrator’s post appointment costs. The vast majority of the knowledge that you need in order to seek the appointment and negotiate the sale is repeated in the proposals and by drafting proposals that include the relevant SIP 16 disclosure at the outset you can ensure that nothing is missed that could delay their issue later. Remember that it is not essential for a statement of affairs to be submitted with the proposals and that you can instead issue the proposals with a summary of the financial position of the company and the names and addresses of creditors. You can explain that you are issuing the proposals before the director has had a chance to prepare the formal statement of affairs and in a similar way any information that you lack in those first few days can usually be covered by saying what you propose to do about it.
It was hugely tempting, when planning this article, to end it there. Other commentators have focussed on the detailed requirements in the appendix to the SIP and set them out as a checklist to ensure compliance. To our minds, the emphasis has to be on the principles and the key compliance standards. The detail in the appendix, which is a development from paragraph 9 of the old SIP that caused so many IPs difficulty, is only guidance. It is a very well written suggested framework to make sure that the disclosure meets the principles and is “a detailed explanation and justification…”.
We are not criticising the appendix and indeed we love the new groupings used and intend to re-draft our own proposals templates to use those categories to give the disclosure structure, but we are absolutely convinced that it would be the wrong approach to just tick through the appendix and report on each point. The whole reason that the Insolvency Service felt it was necessary to issue Dear IP 42 after the original SIP 16 was that IPs were focussing on paragraph 9 and not giving a properly rounded, narrative explanation. It would be sad if IPs were penalised again for taking the wrong approach because they were led to misunderstand the priority of the differing elements of the SIP.
Our message about the appendix is to use it as guidance, not as a checklist. Use the groupings to structure your disclosure, but concentrate on a clear narrative that explains events and your thinking. Don’t just disclose the facts in bullet points, but explain why you took certain decisions and link logical disclosure together. Possibly the best example of this is in the excellent “Valuation of the business and assets” section, which makes it clear that in among the details of what was valued, by whom and for how much, there should be an explanation of how the sale values achieved relate to the valuations.
So, as promised, to summarise: the new SIP 16 is more than just a re-hash of the old SIP 16 and Dear IP 42. It is a much stronger statement of the principles and key compliance standards, supported by a helpful appendix which, if used the right way, should ensure a consistent standard of explanation about why and how a pre-pack took place. Unfortunately, our suspicion is that with the government already consulting further on pre-packs and a vocal minority implacably opposed to any sort of early settlement, especially where connected parties are involved, pre-packs will continue to face criticism and the current changes may have little impact on that debate.
