Regulation, prepacks and disqualification: recommendations and legislative proposals

19/06/14

In a written Ministerial Statement published on 16 June 2014,  Business Minister Jenny Willott has announced proposals for a "Way forward on insolvency practitioner regulation and prepacks".

With regard to IP regulation, members may recall our previous news item of 11 March 2014, on the Insolvency Service's consultation paper "Strengthening the regulatory regime and fee structure for Insolvency Practitioners".  Following responses to that consultation (which are available with the Ministerial Statement), the Government has announced that it intends to bring forward regulatory measures, when Parliamentary time allows. These will include providing the Insolvency Service with the power to apply to court for a sanction against an insolvency practitioner, and a reserve power to replace RPBs with a single regulatory body.  As far as fees are concerned, the proposals set out in the original consultation document remain subject to further discussion.

On prepacks, the statement accompanies the publication of the report by Theresa Graham, commissioned last year by Business Secretary Vince Cable.  The recommendations in the report are agreed to in full by the Government, which now urges the profession and business to adopt the voluntary measures proposed (subject to a reserve power to legislate if felt necessary). 

In her report, which draws on empirical research commissioned from the University of Wolverhampton, and discussions with stakeholders (including the ILA's Technical Committee),  Ms Graham concludes that, overall, the pre-pack process supports business rescue, but it needs "cleaning up".  Evidence from the research indicates that, when pre-packs and trading administrations are compared on a like for like basis, those businesses which have been pre-packed were more likely to survive.

The measures recommended (set out in section 9 of the report) are of a voluntary nature, although if compliance with them turns out to be low and/or if "bad behaviours" continue, Government regulation may follow.

The key features of the recommendations are:

• As regards transactions with "connected parties", the report includes a definition for the purpose of the recommendations (which will not be given legislative effect), and contains a specific exemption for sales to secured lenders holding security (with related voting rights) over 1/3 or more of the shares in both the insolvent company and Newco. 
• The report envisages the establishment of a "prepack pool"  under the aegis of a secretariat, which would have responsibility for selection, training, monitoring and evaluation of pool members, who  would be  "experienced business people", possibly nominated by organisations such as the CBI, IoD and trade representative organisations. 
• It envisages a voluntary approach to the Prepack pool by a connected party proposing to enter into a prepack transaction (or any transaction between the connected party and the insolvent company which creditors will not be notified of prior to implementation). Having considered the proposal, a single pool member will opine on the deal, seemingly limited to whether the grounds put forward for the connected party transaction are "reasonable" or not. 
• The report envisages no more than a ½ day review of the papers by the single member of the pool, whose fee would be paid by the connected party. The fee will also pay for the administrative costs associated with maintaining the pool.  There is no prescribed format for the pool member's statement, although a specimen form of words is set out in Annex H to the report.  
• Again on a voluntary basis, the connected party will complete a viability review, stating that the connected party has formed the opinion that Newco is and will remain a going concern for at least 12 months from the date of the statement, and giving the grounds for such an opinion. The report anticipates that the viability statement could, on a subsequent insolvency of Newco, be taken into account in considering disqualification proceedings against the connected party director.  
• Annex A of the report sets out a draft further revision of SIP 16, which the Joint Insolvency Committee is asked to consider at the earliest opportunity. 
• The revised SIP 16 statement would include reference to the pool member's assessment (or to the fact that the connected party has chosen not to approach the pool, or chosen to disregard the pool member's opinion), and a copy of the viability statement, if available (the office holder would not be expected to comment on the viability statement as such). 
• The revised SIP 16 statement would also require confirmation that valuations have been carried out by a valuer who holds PI insurance (or, if not, should explain the reasons for choosing a valuer without such insurance). 
• All marketing of prepack businesses should comply with six "principles of good marketing" (including marketing via the internet by default) with  any deviation from them drawn to creditors' attention in the SIP 16 statement. 
• The Insolvency Service would withdraw from monitoring SIP 16 statements and their monitoring will be picked up by the RPBs. 

Whilst the report recognises the benefit of prepacks, both for individual businesses and for businesses as a whole, and is welcomed, it remains to be seen how the recommendations will be implemented in practice, given that the Government is looking to the profession and the business community to give effect to them.  Who will take the lead in setting up and supporting the pool, and how will its benefits be monitored and assessed? The report envisages that the review by the pool member will take no more than ½ day, on the basis of written submissions only.  However, little mention is made of the possible delay in the allocation of a pool member, the notice a panel member might reasonably require, or how much detail the pool member would require, or the likely level of fees. These can be expected to impose additional burdens on transaction timings and transaction values, bearing in mind that, as the report notes, the majority of prepacks to connected parties are for less than £100,000.
 
In relation to the oversight of SIP 16s by RPBs, this will have to dovetail with any subsequent transfer of regulatory oversight, under the regulatory proposals set out in the same Ministerial Statement, to a single regulator.  The Technical Committee will update members as matters develop and will seek to contribute to the debate which will invariably surround the setting up of the pool, the pool process and the suggested revisions to SIP 16.
 
In other developments, the Technical Committee responded to the discussion paper published last year on "Transparency and Trust: Enhancing the transparency of UK company ownership and increasing trust in UK business" (30, 16 September 2013).  The Government's legislative programme for the next Parliament, as set out in the recent Queen's Speech, includes a " Small Business, Enterprise and Employment" Bill, which will include amendments to the current directors' disqualification regime. It remains to be seen whether the Bill will include provisions, as envisaged by BIS's response to the consultation published in September 2013, for compensation orders against disqualified directors, and for the sale by an office holder of wrongful trading and similar claims to third parties.  With regard to this latter aspect, members may be interested in referring to R3's "Jackson Campaign" (which follows research commissioned by R3 and published in April 2014). The research and details of the campaign are available on the R3 website (including to non- members).

The Technical Committee will update members as and when the detail of the proposed provisions is clarified and on the draft legislation.

The Graham review can be accessed directly here.

Transparency and Trust