In February 2015 we considered the Government’s Graham Review of pre-pack administrations. This article revisits the topic to examine the implementation of the first of the six key recommendations – the Pre Pack Pool (PPP).
The Graham Review
The Graham Review suggested a number of changes to pre-pack administrations - arrangements where the sale of all or part of a company’s business or assets is negotiated prior to the appointment of an administrator. The administrator then completes the sale after appointment.
The Review’s recommendations were endorsed by the Government and have now been incorporated into an amended Statement of Insolvency Practice 16 (SIP 16).
The Pre Pack Pool
This is summarised as the process whereby:
“On a voluntary basis, connected parties approach a ‘pre-pack pool’ before the sale and disclose details of the deal, for the pool member to opine on.”
It is intended to make pre-pack deals more transparent and address the concern that sales to connected purchasers, such as directors, shareholders and close family members, are inherently less fair to creditors. It is hoped that the PPP will allow independent scrutiny while retaining secrecy before completion.
The structure and mechanics of the PPP
In November 2015 the Government announced the members of the pool and it became fully operational.
To obtain a review, a connected party submits an application form and supporting documents via the PPP website, along with the fee (currently £800 + VAT). This is then reviewed by a pool member within two business days.
Following review, the member will issue one of three opinions:
- Nothing was found to suggest that the proposed pre-packaged sale’s grounds are unreasonable.
- The evidence provided was limited in some areas, but otherwise nothing was found to suggest that the proposed pre-packaged sale’s grounds are unreasonable.
- There is a lack of evidence to support a statement that grounds for the proposed pre-packaged sale are reasonable.
According to the PPP website, when reaching a decision the member will “consider the grounds given by the applicant for the pre-pack transaction, specifically with regard to the impact on creditors of the company in administration, and why there is a need to acquire the business though a pre-pack administration”. However, in the interests of costs and efficiency, no reasons will be provided for the opinion, nor is there a right to enter into correspondence with the member and/or to appeal the opinion.
The powers of the PPP
The PPP does not have any direct powers and the opinion is not binding. The final decision on the sale rests with the administrator.
So why bother?
For the applicant, the process provides an additional layer of reputational protection and helps to avoid criticism of any secrecy in the deal. Further, a positive “not unreasonable” opinion will, presumably, add a layer of credibility to the administrator’s decision. Of course the risk is that the opinion is one of the less favourable outcomes. While not preventing the sale, that will inevitably mean a greater focus on the rationale should the deal proceed.
There is clear guidance that the application is not a public document. However, the opinion may be included within the administrator’s SIP 16 statement or, if consent for disclosure to the administrator is withheld then this will also need to be stated.
So what does all of this mean for the profession?
While applying to the PPP is not mandatory, its inclusion in SIP 16 means that it is something that practitioners need to be aware of.
Some issues that we can foresee arising are:
- Data protection concerns: the PPP may request that the applicant provide supporting information. Care and attention will be needed to ensure that the information provided is disclosable.
- Conflicts: clearly the proposed administrator cannot advise the applicant. Referrals to other IP or corporate/commercial lawyers for advice on the application process may therefore be necessary creating new business and a potential new area of risk.
- Regulatory complaints: according to the PPP website, a regulatory complaint would not be well-founded where the opinion suggested that there was insufficient evidence to support the grounds for the sale. It is not clear whether the same would apply if the opinion was that the proposed pre-packaged sale was “not reasonable”. This will, presumably, depend upon a critical analysis of the administrator’s decision. This emphasises the importance of a detailed and reasoned record of how the decision was reached.
- The purchaser who chooses not to apply: does the proposed administrator have an increased exposure to personal risk by proceeding with a transaction not scrutinised by the PPP? Should the decision not to apply put him on notice that all is not well?
It appears that disappointed applicants have no recourse in the event that a member’s opinion leads to the loss of a purchase. We doubt however that this will be satisfactory if the PPP is to become an established regime.
It is too early at this stage to have a real feel for how popular the PPP process will become and the consequences, if any, of ignoring a member’s opinion. Given the Government’s endorsement of the process however, it would appear that if the uptake is not sufficient, it may become mandatory. If so, we are certain that the issues raised above are the tip of the iceberg.