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BIG new law on pre-packs – significant? Yes – but needed.

From the 30th April 2021, in an aid of increasing creditor confidence in pre-packs, new legislation is coming into force, namely, ‘THE ADMINISTRATION (RESTRICTIONS ON DISPOSAL ETC. TO CONNECTED PERSONS) REGULATIONS 2021. Yes, it’s always a long-winded title.

Following the introduction of the (optional) pre-pack pool a few years ago, regarding connected party transactions, the regulators have decided that some form of creditor approval or independent review process needs to become mandatory. Given the expected insolvency escalation in the coming years, its likely they foresee a rise in such asset sales occurring, therefore wishing to standardise the process. In all honestly, it’s probably about time for better regulations in this area. This report is then is considered by the administrator and subsequently disclosed to creditors. But what do YOU need to know? Well….

In order for a pre-pack sale to occur (i.e. the sale of substantial assets to connected parties), there now must have been a review by either company creditors themselves or an independent evaluator, through a ‘qualifying report’, which theoretically could still be the pre-pack pool. Either way, the transaction cannot occur until there has been independent scrutiny and approval of the transaction. Formerly this was not required, it was merely optional.

If you’re unfamiliar about the pre-pack pool, they are effectively a group of individuals, set up by the IPA to provide independent opinions on these connected party/pre-pack sales, however until/ now, it was up to the buyer/seller to decide whether they wanted this to take place.

So when exactly does the insolvency practitioner have to get approval? Well when there’s a “substantial disposal” which is defined as a:-

means a disposal, hiring out or sale to one to more connected persons, during the period of 8 weeks beginning with the day on which the company enters administration, of what is, in the administrator’s opinion, all or a substantial part of the company’s business or assets, and includes a disposal which is affected by a series of transactions’.

Ultimately if the transaction is being approved by creditors, the Administrator will now have to write to them calling a decision procedure specifically regarding the sale, permitting them to vote on the proposal, including making modifications if necessary.

The ramifications of this to the purchaser is that obtaining creditor approval can take a number of weeks, which in turn means the Administrator would likely have to trade the business for that period of time. It could be possible for the proposed Administrator to try and obtain approval pre-appointment, enabling the pre-pack shortly after the administration order (which is the norm) however the potential ramifications of this are substantial if not carried out comprehensively and with full creditor details.

Given this, it seems pragmatic that the likely way forward is through obtaining a ‘qualifying report’. The report is ordered by an individual or company who is a connected party purchasing the business/assets, not the administrator. Following the report, no material changes i.e. disposal of property can occur at the company whilst the administrator considers the contents of such report.

The administrator also needs to be satisfied that the evaluator making the report had sufficient knowledge, expertise, independence and experience to make the report itself. Effectively this means that the buyers’ mate can’t just write the proposal, as certain criteria must be met, including, but not limited to, professional indemnity insurance. It’s pragmatic to suggest these individuals are likely to be the pre-pack pool (at a cost of £950) or a relevant and qualified agent (varying cost). It is worth noting that a number of evaluators can carry out reports, however they all need to be disclosed to the Administrator, or if not, explained why.

The benefit of the evaluator’s report does likely enable this to be carried out pre-appointment, facilitating the pre-pack sale swiftly after the administration order, which is usually desirable to all parties.

Ultimately if Directors are looking at putting their company into administration with the intention of deriving to buy back the assets of the company, whether that be themselves or any other connected parties, then this evaluator report needs to be taken into careful consideration. Indeed the administrator may have to consider not proceeding with the transaction and subsequently may be required to put the assets on open market, if sale to the connected parties is not recommended by the evaluator.

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