SIP 16

A new Statement of Insolvency Practice 16 (E&W) on Pre-Packaged Sales in Administrations (referred to as SIP 16) issued by the Association of Business Recovery Professionals (otherwise known as R3) became effective on 1 January 2008. SIP 16 requires insolvency practitioners (referred to as IPs) to provide transparency to creditors about pre-pack sales and sets short timescales for the provision of such information. SIP 16's arrival is timely given the growing media attention being devoted to "pre-pack" administration sales.

A "pre-packaged sale" or "pre-pack" refers to an arrangement under which the sale of all or part of a company's business or assets is negotiated with a purchaser prior to the appointment of an administrator, and the administrator effects the sale immediately on, or shortly after, his appointment. This differs from a more traditional administration where the company might trade in administration for a period, while the company's business or assets are marketed, before the administrator concludes a sale with a purchaser. Both types of administration sale are lawful under current insolvency laws.

The major issue here is that pre-packs do not allow creditors any opportunity to be consulted before the sale occurs. This can leave creditors feeling disenfranchised if the business is sold to directors or parties connected with the insolvent company, as is often the case. It should be noted that although pre-packs have received much negative attention in recent weeks and months, traditional administration sales often take place before creditors can be consulted as well. Although a lack of creditor consultation is not unique to a pre-pack administration, it is often felt more keenly in a pre-pack situation because of the perception that a deal has been "stitched up" between the insiders, which leaves the creditors nursing unsecured claims.

A Statement of Insolvency Practice is a guidance note to licensed insolvency practitioners intended to maintain standards by setting out best and expected practice.

SIP 16

  • reminds IPs of the duties they owe to the company's creditors as a whole;
  • requires IPs to keep a detailed record of the reasoning behind the decision to undertake a pre-pack sale, and be able to explain and justify why it was considered appropriate;
  • requires IPs (except in exceptional circumstances) to disclose detailed information to creditors including marketing activities, valuations, justifications for the pre-pack sale and reasons why alternatives were not appropriate, consideration received, the identity of the purchaser and any connection between the purchaser and the insolvent company;
  • requires IPs to provide the above information to creditors with the first creditor notification unless it is impracticable to do so, and hold the initial creditors' meeting as soon as possible after appointment.

The timetable for the SIP disclosure to creditors could be onerous in large cases, and IPs may need to start preparations in advance of appointment.

Click here to view SIP 16.

New Insolvency Code of Ethics

January has also seen the introduction by the Insolvency Service of an updated Insolvency Code of Ethics (the Code), which has been revised to align more closely with the model adopted by the International Federation of Accounting Bodies.

The purpose of the Code is to provide a high standard of professional and ethical guidance among insolvency practitioners.

The Code describes five fundamental principles that underpin an insolvency practitioner's approach both in accepting instructions and appointments, and in the conduct of such work. These are: integrity, objectivity, professional competence and due care, professional behaviour and confidentiality. The Code goes on to set out a framework that insolvency practitioners can use to identify actual or potential threats to the fundamental principles and determine what safeguards, if any, may be available to meet such threats. The Code provides many specific examples to help with conflicts of interest situations and when they can, and cannot, be overcome.

Although the text of the new Code looks quite different from the old version it replaces, the Insolvency Service considers that the application of the new Code in practice will not be substantially different.

Click here for a copy of the Code.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 27/01/2009.