Australia’s law reform aversion to pre-packaged insolvencies – “pre-packs” – compares with a process of their cautious acceptance and continual refinement in England. A new Statement of Insolvency Practice has been issued in the UK – SIP 13 – Disposal of Assets to Connected Parties in an Insolvency Process, which supports the guidance and rules in SIP 16 – Pre-packaged sales in administrations. Meanwhile, the UK’s “pre-pack pool” continues.
A “pre-pack” refers to a sale of a failing company’s business before the formal appointment of a liquidator, with the sale completed on the liquidator’s appointment. Its benefit is said to be that a better price can be obtained pre-liquidation before the company’s financial position – a “liquidation sale” – hits the market. The concern is over the lack of transparency of the process, often effected without the knowledge of creditors; valuations can be problematic; and sales are often made to the original owners of the business, or parties connected to them. The creditors receive what limited dividend is possible out of the sale price and the new business starts afresh with its slate wiped clean.
Australia and the UK compared
Australia’s 2015 Productivity Commission Report 75 rejected the English pre-pack model, Australia’s stricter independence requirements being one reason. Generally, the Report supported what it called “pre-positioned” sales but only organized during a “safe harbour” period. Hence it was interdependent on such reforms proceeding.
However, the English professions put some effort into assessment and monitoring of their various reforms and there has been a series of changes to the legal requirements for pre-packs in recent years. In particular, the major Graham Review in 2014 has been followed by a series of refinements and improvements since then, including the oversight of the process by an independent pre-pack pool of experienced practitioners.
The courts in the UK have generally approved pre-packs, or not taken exception to the conflict involved in view of the benefits involved. Indeed, pre-packs are not found in English statute law, but are the result of the profession’s work in using them through the administrator’s power of sale. They then became to be regulated by the profession itself, but even then the courts have exercised their own minds when assessing them, and professional codes generally.
In Sisu Capital Fund Ltd v Tucker  EWHC 2170 (Ch), in relation to a claimed breach of professional standards on conflicts, the High Court referred to a “distinction to be drawn between the interests of the insolvency administration and any guidance given by a relevant professional body”, with the Court’s focus being on the former.
For a good coverage of relevant English law and policy on this aspect, see Insolvency Law, 3rd ed, Keay & Walton, Jordans 2012, at 7.5.3.
New Statement of Insolvency Practice 13
What was SIP 13 – Acquisition of Assets of Insolvent Companies by Directors is to be replaced by SIP 13 – Disposal of Assets to Connected Parties in an Insolvency Process, effective from 1 December 2016. This supports SIP 16 – Pre-packaged sales in administrations, and the key compliance standards – preparatory work, marketing, duties after appointment, and disclosure: see the R3 website.
The oversight by the pre-pack pool remains. SIP 13 will apply to connected party transactions in both corporate and personal insolvency. It is said to have been drafted in a proportionate way, recognising that it may apply to low value transactions where the costs of the process must be contained. It focuses on providing a narrative explanation of the transaction rather than prescribing the information which should be disclosed. This is in accord with other English reforms, applying in 2017, seeking information rather than form based content. It adopts the principles and key compliance standards format used for all new SIPs. SIPs cover a wide range of standards across insolvency practice – meetings, handling of funds, investigations, remuneration. And wherever possible, it uses language which is consistent with SIP 16.
The new SIP 13 was developed by a working party of the Joint Insolvency Committee, comprising insolvency practitioners and creditor representatives and the Insolvency Service and was the subject of a public consultation process earlier in 2016.
England does however acknowledge the potential for pre-packs to be abused. The Secretary of State has a reserve power to make regulations in the future to either prohibit administration sales to connected parties or to impose conditions or requirements to allow a connected party administration sale to proceed. This would include connected ‘pre-pack’ sales. This reserve power lapses in May 2020. The government envisages that this reserve power would only be used if the voluntary measures arising from the major 2014 Graham Report prove unsuccessful, the pre-pack pool being one.
Necessarily, pre-packs remain under healthy scrutiny in England by the Insolvency Service and others.
It is apparent from this where the concerns in the process lie. Pre-packs represent a balance in favour of expediency and speed and possible better outcomes over disclosure and considered creditor involvement but also low returns, a common bias found in much of insolvency law and policy. There is a danger in compromising creditors’ rights too much, with consequent impact on commercial trust and morality; on the other hand, low or nil creditor returns also diminish the standing and purpose of the insolvency regime, and create a moral hazard for creditors.
SIP 13 along with SIP 16 attempt to maintain that fine balance, with close involvement of the profession and the regulator.
The Australian government may have ideas on pre-packs in its ‘reform agenda’, but only in so far as they were the subject of recommendation in PC Report 75.
It seems that what is a less adventurous, or more cautious, profession in Australia is waiting on government to say, preferably by regulatory legislation, what can or cannot be used by way of pre-packs.
Whatever is decided, Australia should ensure that we have taken into account up-to-date information assessment from what is a more fast-moving and considered English law reform environment.