Proposed changes to the pre-pack process

The Insolvency Service published a report in October (with proposed draft regulations) on the changes it proposes to implement to pre-pack sales to connected parties during the administration process. In short, if the draft regulations are adopted, any pre-pack sale to a connected party will require either the consent of the company’s creditors or a report provided by an independent evaluator.

By way of background (if needed), the pre-pack pool was introduced in 2015 following, and as recommended by, the Graham Report. There was a further review of pre-pack sales to connected parties in 2017, in which it was noted that, in 2016, the number of businesses being marketed externally had increased from 49% to 77% of those applicable transactions. However, the use of the pre-pack pool is and remains voluntary, and it appears that the number of referrals to the pool is reducing. It has been suggested that the pre-pack pool has not always been pursued because it is another step in the process, there is insufficient time and it imposes further cost.

The draft regulations (due to be considered by Parliament before June 2021) are to be adopted under a new paragraph 60A of Schedule B1 of The Insolvency Act 1986 and currently propose the following changes:

Where there is a be a “substantial disposal” – a disposal, hiring out or sale to one or more connected person of what is, in the administrator’s opinion, all or a substantial part of the company’s business or assets – it shall not proceed during the eight weeks from the day that the company enters administration without one of the following having occurred:

• Creditor approval (under paras 51(1) or 52(2) of Schedule B1) to the proposed substantial disposal; or
• The connected person has obtained a report from an independent third party (the evaluator) which complies with reg 8 of the proposed regulations in writing and including a statement as to independence, knowledge and experience of the evaluator. The report should also identify the relevant property, the consideration to be paid and the evaluator’s view on the proposed transaction (whether or not in his opinion the case has been made for the substantial disposal).

Whilst the administrator is obliged to consider the evaluator’s report, it does not prevent them from going ahead with the sale as long as they can justify their decision.

Finally, the report has to be sent to both the creditors of the company and filed at Companies House at the same time as the administrator’s proposals (pursuant to para 49(4) of Schedule B1).

Whilst the proposed changes will remove the voluntary aspect of the pre-pack pool, it does widen the identity of the proposed evaluator to include anyone who is not connected with the company, an associate of the connected party, does not have a conflict of interest with respect to the substantial disposal or has in the preceding 12 months provided advice to and in respect of the company or a company connected with the company the subject of the proposed administration.

The Evaluator must also self-declare as to their knowledge and experience and not be excluded from providing a report for the reasons set out above and/or any of the exclusions set out at reg 11 of the proposed regulations.

Whilst the proposed regulations do provide creditors with greater assurance as to the transparency of the process, it will make the requirement to obtain a report mandatory, thereby adding that further step and expense which has previously been avoidable. However, the eventual administrator is still not obliged to follow the evaluator’s opinion and the connected party/proposed buyer can seek a report from a number of different evaluators.