In a Government commissioned review, accountant Teresa Graham made six recommendations designed to improve the sometimes controversial pre-pack administration process - a process that has been frequently used in retail.
1. Independent scrutiny of pre-pack deals
Graham said one of the main criticisms of pre-packs to have come up from her review is a lack of transparency in pre-pack deals.
In order to increase transparency and give more confidence to creditors that a deal has undergone independent scrutiny, Graham has proposed that a “pre-pack pool” of “experienced business people” is created. That would mean details of a proposed sale to a connected party - “where the controllers of the new company are connected with those that controlled the insolvent company” - can be assessed independently prior to the sale taking place.
2. Viability review
Graham proposes that a connected party draw up a “viability review” of the new company, stating how it will survive for at least 12 months from the date of the statement. She suggests that a short narrative is created, detailing what the new company will do differently from the old one in order to ensure that the business does not hit the buffers again.
The document will then be attached to a statement, known as SIP 16, sent to all creditors by the administrator within seven days of the sale and explaining why an insolvency practitioner decided on a pre-pack sale.
3. Clearer langauge
She recommends that a redrafted SIP16, which includes a number of changes including tightening of the language, is used.
4. Improved marketing of the business for sale
Where marketing for the sale of a business in adminsitration is carried out, it should conform to broad “good principles of marketing”. She has recommended that the business should be marketed as widely as possible, proportionate to the nature and size of the company in order to make the its availability known to the widest group of potential purchasers in the time available, via whatever media is likely to achieve this.
She also says that marketing should be undertaken for an appropriate length of time to allow for the best deal to be sought.
She recommends that the valuer instructed to value the business/assets carries professional indemnity insurance (‘PII’) and, where this is not the case, that they explain their reasons for choosing a valuer without such insurance.
She said the reasons is that “creditors of an insolvent company can be better satisfied that a valuation executed by someone with such cover will represent a fair value for the business/its assets”.
6. Professional bodies assume greater responsibility
Graham recommends that the Insolvency Service withdraws from monitoring SIP16 statements and the responsibility be carried out by recognised professional bodies (RPBs) such as the Chartered Association of Certified Accountants.
She said: “In the five years since monitoring commenced, the Insolvency Service has done a good job, in both ensuring compliance with the SIP and in publishing the results, shedding some light on this practice where previously there had been none.
“However, I believe that, five years on, scrutiny of the SIP16 statements is a matter best left to the RPBs. l believe that they are best placed to do this having the right level of practical experience to further improve compliance rates as well as to monitor compliance with the SIP and my suggested new SIP16, should the Joint Insolvency Committee amend it in line with the recommendations of this review as part of their role in regulating those insolvency practitioners that they license.”
…Legislation may follow if change is not made to the existing system
Graham added: “Should these measures fail to have the desired impact and they are not adopted as I would hope by the market, then Government should consider legislating.”
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