Regulations on pre-packs to connected party published

Pre-packed administration sales are a useful tool for quickly rescuing businesses in financial difficulties. A pre-pack typically refers to the process where the terms of a sale of the company’s business or assets are agreed with the proposed buyer before the appointment of administrators. The sale is then concluded on, or very shortly after, the appointment of administrators. There has been mounting criticism of pre-packs on the basis that there is a need to protect the restructuring process whilst protecting the interest of creditors.

In October 2020 the Insolvency Service published a report on the changes it proposed to implement to pre-pack sales to connected parties during the administration process. Our initial discussion of this report can be found here and in February 2021, the government published the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 (the Regulations) which will come into effect on 30 April 2021.

The Regulations will mean that an administrator cannot pursue a pre-pack sale of a business where:

• The sale (or other form of disposal, including hiring out) is of all, or substantially all, of the insolvent company’s business or assets
• It is within the first eight weeks of the administration
• The disposal is to one or more persons connected with the company

unless the administrator has obtained the approval of the creditors or the purchaser has obtained a qualifying report from an evaluator.

The definition of a connected person (contained within paragraph 60A of Schedule B1 of the Insolvency Act 1986) includes the company’s directors, shadow directors, associates of the company or a company connected to the company the subject of the proposed insolvency procedure

Identity of the evaluator

There are some concerns regarding the identity of the evaluator. The Regulations simply provide that the evaluator needs to believe that he/she has the ‘requisite knowledge and experience’ to give an opinion and that the administrator must have no reason to believe that the evaluator did not have the same.

There is no requirement for the evaluator to hold any professional qualifications, but they will however be required to have professional indemnity insurance. It remains the case that the evaluator is the person to decide whether he/she has the ‘requisite knowledge and experience’ to prepare the report.

Contents of the evaluator’s report

The report must state whether or not the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances.

The Regulations require the evaluator to confirm in their report that he/she has been provided with a copy of any previous reports, or, if a previous report has not been obtained, the evaluator must address that in their report by giving reasons why the previous report has not been obtained and steps taken to obtain it. If a connected person states that no previous reports have been obtained, the evaluator must include a statement in their report to that effect.

In particular, the report needs to address/contain the following:

• A statement that the person making the report is an evaluator within the meaning of an evaluator given by the Regulations, and to what relevant knowledge and experience the evaluator has to make the report
• Information concerning the professional indemnity insurance
• Identification of the relevant property
• Information regarding whether a previous report has been obtained pursuant to regulation 8, and if not, a statement that the evaluator is satisfied that regulation 8 does not apply
• A statement as to the nature of the consideration that is to be provided for the relevant property expressed in sterling
• Identification of the connected person and a statement as to their connection to the company
• A statement that either the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstance, or that the evaluator is not so satisfied, and their principal reasons for making either statement and a summary of the evidence relied upon.

What is the impact of the Regulations?

Whilst we appreciate what the government is trying to achieve by implementing these changes, in reality these Regulations will add another layer of expense to the pre-pack process and may not necessarily help to protect the interest of creditors, whilst effectively delaying the sale process (and the benefits that this can produce).