March 15th, 2021 / Insight posted in Articles

New pre-pack administration legislation

In response to mounting criticism of pre-pack administrations, UK government published draft regulations on 8 October 2020, which were intended to regulate and scrutinise pre-pack sales to connected parties. The regulations required that, in relation to the sale of all or substantially all of an insolvent company’s business or assets to a connected party*, either the administrator obtained the prior approval of the company’s creditors or the buyer obtained an opinion from an independent evaluator as to whether the terms of the sale are reasonable.

Following a consultation period, the draft statutory instrument of the regulations was published on 24 February 2021 and will now be debated in parliament. The regulations must be enacted by 30 June 2021.

The intention behind the proposed regulations is to increase both transparency for the creditors and confidence in administration sales to connected parties. These regulations will be mandatory and the main features are as follows:

  • Any disposal of most or all of a company’s assets made in the first eight weeks after administration to a connected party must first either be approved by creditors (a simple majority of creditors in respect of value of claim. The approval will not be effective if 50% or more of creditors not connected to the company vote against it) or an independent evaluator.
  • The purchasing company engages the evaluator who produces a report on the disposal (whether favourable or not).
  • More than one report can be obtained.
  • The administrator will be required to send a copy of the report(s) to creditors of the insolvent company and to Companies House.
  • The evaluator must be independent of the connected party purchaser.

What is a pre-pack administration?

A pre-pack administration is the sale of an insolvent company’s business and assets by its administrator, where the terms of the sale are agreed and documented prior to the appointment of the administrator. The sale is concluded immediately following the appointment of the administrator.

The benefit of a pre-pack administration is that it preserves the value of the business by enabling a seamless transition of the trading enterprise. These sales are often completed on an accelerated basis with limited marketing and a truncated sale process. A key feature of these sales is that creditors and other stakeholders will often only find out about the pre-pack post-transaction. Furthermore, creditors are usually particularly concerned when the pre-pack sale is to a party connected to the seller (for example, existing management, shareholders or relatives).

The existing regime

The existing voluntary regime was introduced in November 2015. Connected buyers can refer a proposed sale to the ‘pre-pack pool’. The pre-pack pool is a group of independent experts, set up by the insolvency industry, who review the sale proposal and determine whether it is reasonable. However, as it is not mandatory, the pre-pack pool is not currently widely used by buyers. An administrator also has to fully document his decision making and sales information to creditors via a Statement of Insolvency Practice 16 (SIP 16).

The evaluator

As of yet, it is not clear who can (or cannot) act as an evaluator. However, both the evaluator and the administrator must consider that the evaluator is independent from the administrator and the buyer, and has the requisite knowledge and experience to review the proposed sale. The evaluator’s opinion will set out whether, in light of the circumstances, the proposed sale is reasonable.

Are the proposed changes positive?

The regulations appear to be a welcome move to improve transparency to a process that has attracted criticism. The evaluator report may provide creditors with an added layer of comfort, but the added costs and delays this report(s) may cause by adhering to new compliance measures, may hamper the ability to use pre-packs, thus harming creditors.

*Connected parties

A “connected person” for the purpose of the regulations is defined in paragraph 60A(3) of Schedule B1 of the Insolvency Act 1986. Therefore, any common directors, shareholders, and controlling entities (or their associates) would be considered connected.