On 8 October 2020, the Government published its report to improve the transparency of pre-pack sales in administrations. This report was accompanied by a set of draft regulations to increase independent scrutiny of sales to connected parties.
On 24 February 2021, the draft legislation was published and will now be debated in the Commons and the Lords and is expected to come into effect from 30 April 2021.
The key changes that are being brought in are:
1. The regulations will apply where there is a “substantial disposal” of the company’s assets by an administrator.
2. An administrator will be unable to make a “substantial disposal” of company property to a connected person within the first 8 weeks of the administration without either the approval of creditors or an independent written opinion.
3. Where a qualifying report does not support a sale, an administrator may still proceed with the sale if the Administrator provides a statement setting out their reasons for proceeding.
4. The written qualifying report is to be obtained by the connected person (i.e. the purchaser) and then provided to the administrator.
5. The independent qualifying report is to be provided by an individual, who is an evaluator, and must be independent of the connected party purchaser, the company, and the administrator.
6. Alternatively, rather than obtaining an independent qualifying report, an administrator can seek approval from the company’s creditors when issuing their proposals.
Under the regulations, an individual will be qualified to act as an evaluator if, “their relevant knowledge and experience is sufficient for the purposes of making a qualifying report.”, have professional indemnity insurance, are independent and are not excluded by the regulations.
The evaluator requires professional indemnity insurance that will provide them with cover in the role of evaluator.
Furthermore, the regulations will require the evaluator to state in their written report that they have considered any previous report obtained. This is to avoid connected parties ‘opinion shopping’ for the best outcome.
What’s in a Qualifying report?
The report must contain the following –
- A statement that the individual making the report meets the requirements for acting as an evaluator.
- A statement as to what relevant knowledge and experience the evaluator has to make the report.
- Details of professional indemnity insurance.
- Details of the relevant property associated with the “substantial disposal”.
- Disclosure of previous qualifying reports obtained by the connected party.
- Details of the nature of the consideration that is to be provided for the relevant property and the value of that consideration.
- Details of the connected party and their connection to the company.
- 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 principal reasons for reaching that decision and a summary of the evidence relied upon.
So What Does it all Mean?
While I understand that pre-pack administrations are unpopular, because creditors have little involvement and have to trust an unknown professional to exercise their judgement, pre-packs are also an excellent tool to save underlying businesses that are successful. Afterall this is one the driving forces behind the statutory purposes of an administration.
As the pre-pack pool is not required by law and is a voluntary measure that the connected party can opt to take, unsurprisingly many connected parties choose not to. Accordingly very few referrals have been made. It is therefore not surprising that this legislation has been brought in to force the issue.
My view is that it is a good idea for a connected party to justify to an independent person, why a pre-pack is in the best interests of creditors. This will not only provide reassurance to the creditors, but also the proposed administrator as well.
While this legislation will help, creditors, and other stakeholders, will need to trust both the evaluator and the administrator to properly assess the situation. The best way to achieve trust, in my view, is to give full disclosure in the SIP 16 Report and the Proposals, so creditors can see the benefit of what the administrator has done. Without that I anticipate creditors distrust of pre-packs will continue.
Also, the fact that administrators can choose to proceed with the sale, even if a negative report is received, may worry creditors. However, in my view, as a licensed insolvency practitioner, I would be very worried in proceeding with a sale where an evaluator did not approve the sale. If an administrator did proceed with such a sale I would expect their Governing Body, and creditors, will wish to review the matter very closely.