Pre-packed administration sales, or pre-packs, are a useful tool for quickly rescuing businesses in financial difficulties.
Such sales must always be balanced against the need to protect the veracity of the restructuring process and the interests of creditors.
In response to mounting criticism of pre-packs, on 24 February 2020, the UK government laid draft regulations on connected party sales before parliament – having conducted a consultation on this issue in late 2020.
These regulations will now be debated in the Commons and the Lords.
If the draft becomes law in its current form, there will be some surprising restrictions:
1. The Restriction
The restriction is not limited to connected party pre-packs. The restrictions apply to a 'substantial disposal', being:
1.1 the disposal, hiring out or sale to one or more connected persons;
1.2 during the period of eight weeks beginning with the day on which the company enters administration; and
1.3 of what is, in the administrator’s opinion, all or a substantial part of the company’s business or assets.
2. Connected Persons
The definition of connected person is already contained in paragraph 60A of Schedule B1 of the Insolvency Act 1986 (IA86).
This includes the debtor's directors, shadow directors, non-employee associates of those directors (using the definition of associate contained in s.435 IA86), non-employee associates of the company, or a company that shares such an officer etc. with the debtor company.
3. The Requirements
An administrator "must not" make a substantial disposal unless either:
3.1 approval for the substantial disposal is sought in the administrator's proposals and the creditors approve the same; or
3.2 a written report is provided to the administrator, having been obtained by the connected party, and authored by an evaluator.
4. The Evaluator
Even though the sale will be made be a licenced individual, subject to a large amount of regulation, and capable of being sued by creditors for a sale at an undervalue, the evaluator need only be someone "the administrator is satisfied…had sufficient relevant knowledge and experience to make a qualifying report".
In reality, this means the connected person will be asking the administrator for a recommendation for the evaluator.
The administrator also needs to have no reason to believe the evaluator was bankrupt, subject to a disqualification order etc. (there is a list of restrictions), and that the evaluator had insurance (again, there are requirements in the regulations).
5. The 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.
There is no requirement that the sale does not take place if the evaluator is not satisfied. Nor is there any requirement to consider whether the business will survive in the future. This appears to be just a report on value.
The regulations provide detail on what needs to be contained in the report and also details that the conclusions of earlier reports should also be listed.
The administrator is obliged to file the same at Companies House, and send a copy to all creditors with the administrator's proposals. If the evaluator's report was negative, the administrator also needs to explain why the administrator completed the transaction in any event.
This appears to be an attempt by the government to control the pre-pack sale process, without an understanding of what they are trying to achieve.
The forward-looking requirement of the new business (the 'viability statement' in SIP16) is gone, so this scrutiny is only based on value.
What happens if the connected party buyer's evaluator's report says the buyer is over paying? Presumably, a price chip to the business being sold.
If the evaluator's report says the buyer is under-paying, the administrator will sell anyway, given the administrator has (presumably) run a proper marketing campaign and knows a better sale cannot be found.
In any event, if the administrator sells at an undervalue, the creditors can sue, so the opinion of an unregulated evaluator adds nothing to the proper and fair functioning of the pre-pack sale process.
This article was authored by Stewart Perry, restructuring and insolvency partner at Fieldfisher.
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