Understanding SIP 16 with company administration

Statement of Insolvency Practice (SIP) 16 was introduced on 1st November 2015, and provides detailed guidance for insolvency practitioners involved in a pre pack administration process.  

Pre pack administration is an insolvency procedure whereby the underlying assets of an insolvent company are sold. In some instances the assets are bought by ‘connected parties’ of the insolvent entity, an outcome that can foster mistrust and unease among creditors.

Begbies Traynor can advise on whether a pre pack administration is appropriate for your company, and operates from offices spanning numerous UK locations.

Pre pack sometimes viewed as unethical

The ethics of this type of sale have been called into question by members of the public, and trade creditors owed money by the insolvent business. One can appreciate the scepticism that has tainted this insolvency process in the past, and understand the suspicions of those owed money when directors take charge of a new company.

In an effort to combat this scepticism, the Insolvency Service has introduced SIP 16. It is hoped that greater acceptance of pre pack sales will result from the provision of detailed information to creditors, and greater clarity of the entire process.

The SIP 16 Statement

This is a statement prepared by the insolvency practitioner, detailing how the decision to opt for a pre packaged sale was arrived at, and the other alternatives that were considered.

Ideally, this statement should be provided to creditors on notification of the sale, but no later than one week following the pre pack transaction. If this action is delayed, an explanation should be provided to creditors as to the reason why.

Various issues are addressed within SIP 16, including:

Differentiation of IP roles

Two main insolvency practitioner roles become necessary when a company is insolvent and considering a pre pack administration:

• An advisory role in relation to the company’s insolvent position
• As administrator for the pre pack process

Under SIP 16, an IP appointed to advise the company on possible routes in insolvency will not necessarily become the professional appointed to manage and oversee the pre pack sale.

Insolvency practitioners must explain to directors that their role does not include the provision of advice on a ‘director’ level, and that they should seek legal advice independently.

Directors should also be advised that any valuation of business assets should be carried out by a professional valuer.

Marketing the business

Marketing is an important part of the pre pack sale as far as creditors are concerned, and should be carried out with a view to maximising their returns. A variety of media including online methods should bring the sale to the attention of the widest audience possible, given the size of the company.

A specific strategy for marketing needs to be put in place, and described in detail within the administrator’s written statement. Independent marketing by the IP, in addition to that carried out by company directors, is essential to maintain the ethics of the process.

The length of time the business was marketed will also come under scrutiny by creditors, and justification for this and all other marketing-related actions will need to be provided by the administrator.

Full disclosure

Under SIP 16, insolvency practitioners must disclose in detail how a pre pack sale provides the best outcome for creditors. When directors of the insolvent company are buying the assets rather than a third party, the level of detail should be greater in order to sufficiently explain the decision made.

Disclosures required under SIP 16 include: 

• How the administrator was initially introduced to the company
• The extent of their involvement prior to appointment
• Which alternative options were considered once the company was known to be insolvent
• Whether or not efforts were made to consult with creditors or their representatives, and if not, the reasons why
• Why the business was not traded as a going concern during administration
• How the business was marketed
• Details of the valuations given, and the names and qualifications of the valuers
• Who has purchased the assets, on what date, and whether they have connections to the insolvent business
• Details of the assets sold
• The amount achieved on sale, and any terms of payment applied

These requirements are comprehensive, and from the point of view of an unsecured creditor, cover the most important factors of a pre pack administration. Maximising creditor returns is the theme running through SIP 16, and as some pre pack sales have been successfully challenged in court in the past, it is hoped that it brings greater transparency to the entire process.

As the market leader for corporate recovery, Begbies Traynor can provide professional guidance on the most appropriate exit from administration. We have a network of local offices, and offer a same day meeting free of charge.