On 1 November 2013, a revised version of SIP 16* took effect.

The revised SIP has not imposed any new controls – the aims of the changes are:

  • to improve the transparency of a pre-pack sale**;
  • to provide more information to creditors more quickly; and
  • to improve creditors' confidence in pre-packs and administrations generally.

These are the changes for landlords and tenants to note:

  • Administrators are required to provide a detailed explanation of and justification for a pre-pack sale to creditors within seven days of the date of the transaction.
  • The information administrators need to provide to creditors has been expanded to include:

  • - details of the administrator's involvement in the pre-pack sale before his appointment;

    - details of marketing activities conducted in relation to any of the insolvent company's assets, or an explanation as to why no marketing was undertaken;

    - a greater level of detail about the valuations obtained in relation to the business or any assets, the basis of these valuations and a comparison of these valuations against the sale price actually obtained;

    - details of any transaction where the business or assets have been acquired from another insolvency practitioner by the insolvent company within the last two years; and

    - details of the sale consideration broken down under valuation categories and split between fixed and floating charge realisations.

  • An explanation of and justification for the pre-pack sale must also be included in the administrator's statement of proposals filed at Companies House.

Regulating administrators acting in pre-pack sales

IP 16 was introduced on 1 January 2009 in response to creditors' concerns about pre-pack sales and sets out a detailed list of information which the administrator should disclose to creditors where there has been a pre-pack sale.

A report produced by the Insolvency Service on the first six months' operation of SIP 16 found that approximately 35 per cent of reports issued by administrators fell short of full compliance, due to a failure to provide sufficient detail to creditors.

Still no obligation to give advance warning to unsecured creditors

There was recognition that that prior approval of a pre-pack sale from unsecured creditors would increase confidence. Despite this, the new SIP 16 still does not include any obligation on administrators to provide advance notice to unsecured creditors where it is proposed to sell the insolvent company's assets or business to a connected party.

It was considered that this would come at a disproportionate cost in terms of increased delay and it was felt that such a prior approval mechanism would, in most cases, defeat the whole rationale for entering into a pre-pack, as delay and notice to creditors would result in a diminution of the insolvent company's value.

A pre-pack should be in the best interests of all creditors

It is recognised that, as unsecured creditors, landlords are entitled to ensure that a pre-pack sale is in the best interests of all creditors and that it has not been structured at their expense.

In particular, landlords of the insolvent tenant's worst performing stores often lose out as these assets are unlikely to form part of any pre-pack sale.

The new SIP 16 does not include a prior approval mechanism

A prior approval mechanism would undoubtedly improve a landlord's position in a pre-pack sale. However, the difficulty in implementing such a mechanism has meant that it has not been included in the new SIP 16.

As a result, landlords remain in the disadvantaged position of being excluded from the pre-pack process until after the transaction, with little prospect of being able to recover unpaid rent in respect of any stores not included in the pre-pack.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.