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On 29 March 2021 Parliament approved the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (the Regulations) which are due to enter into force on 30 April 2021. The text can accessed here.

Background

The Regulations seek to remedy what the Government saw as issues arising with what are known as ‘pre-pack’ sales in administrations. These are transactions entered into by an Administrator of a company, usually upon or very shortly after their appointment, whereby the insolvent company’s assets and business are sold to (usually but not always) connected parties (for example the directors or shareholders of the insolvent company). The term ‘pre-pack’ refers to the fact the deal is negotiated and agreed in principle by all parties, including the proposed Administrator, before the appointment. To use now common parlance: it is an ‘oven-ready’ deal completed once the Administrator is in office.

Many people, including those in the insolvency industry, see pre-pack sales as an essential and valuable tool in an Insolvency Practitioner’s armoury, in particular because it means there is an immediate realisation of assets. Importantly, employees are usually transferred to the buyer as part of the deal, meaning many jobs are saved thereby avoiding mass redundancies. Those criticising pre-packs also tend to overlook that the sales are invariably negotiated very quickly and in rapidly changing and time-pressured situations, where there is little or no time to undertake a lengthy marketing process, and the only people who know enough about the business to purchase it are connected parties.

There has however been much media criticism of such arrangements on the basis that there is a perceived lack of transparency about pre-pack sales, and creditors feel they are excluded from the process. There is also a perception that the business is being sold free of its debts to the very people who caused the company’s insolvency.

Prior to the Regulations, the Government’s recommendation following the 2014 Graham Review was that a “Pre-Pack Pool” be established comprising business experts who would be able to provide an opinion on proposed transactions. However, this has remained a voluntary process and it must be presumed that lack of take-up has led to the Government making the Regulations.

The Regulations

In summary the Regulations prevent an Administrator from making a “substantial disposal” to a “connected person” within 8 weeks of the commencement of the administration without either the approval of the company’s creditors or a report from an Evaluator.

It seems difficult to envisage a situation when creditor approval would be sought, not least because the process of obtaining approval can take time, which is not practical in most pre-pack sales. Therefore it would seem that the second option of obtaining an Evaluator’s opinion is going to be the most regularly used procedure.

The Evaluator’s report must be sent to the Administrator and contain a statement as to whether they are satisfied that the terms of the transaction are reasonable or not. If the Evaluator’s view is in the negative, then the Administrator can still proceed with the transaction but they will need to explain their reasons for doing so in a further report sent to creditors and filed at Companies House.

The Evaluator

There has been much criticism of the Regulations in respect of the Evaluator, because the rules do not specify any qualifications for the role. Indeed the only requirements are that the Evaluator a) is independent, b) holds professional indemnity insurance, and c) are themselves satisfied that they have sufficient relevant knowledge and experience. There are a number of excluded persons (for example the Administrator in question, disqualified directors, undischarged bankrupts etc.), but other than those specified essentially anyone can be an Evaluator

The issue for the Administrator however is that the Regulations require them (i.e. the Administrator) to be satisfied that the Evaluator has sufficient relevant knowledge and experience, and are independent and there are no conflicts of interest at the time the report is written.

Whilst in practice the purchaser, Evaluator and Administrator are likely to discuss the transaction beforehand, it is possible under the Regulations that the purchaser could obtain a report from an Evaluator without the Administrator’s involvement. Moreover the Regulations expressly permit purchasers to obtain more than one report (bringing with it the risk of ‘expert-shopping’), although such previous reports must be disclosed to the Evaluator.

Whilst there is no sanction in the Regulations for Administrators who fail to comply with these new rules, the Administrator will need to undertake a thorough analysis of the Evaluator and their report, particularly where the Administrator has had no prior discussions with the Evaluator beforehand. Failing to do so could lead to criticism down the line by disgruntled creditors who feel they have lost out as a result of the sale, as well as potential legal claims by subsequent office-holders and regulatory action by the Administrator’s RPB. Having said that, with careful due diligence by the Administrator (and no doubt their compliance and legal teams), and communication at an early stage with the Evaluator and purchaser, the risk of such challenges are likely to be avoided.

It will be interesting to see how the Regulations work in practice when they finally enter into force, and in particular how Administrators deal with Evaluator appointments.

If you have any queries about this topic, please contact Christina Fitzgerald or any member of the Restructuring & Insolvency team.

Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.

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