Pre-Pack Reforms — Sales to connected parties — Time to evaluate
Pre-Pack Administrations (“Pre-Packs”) have long been criticised for a perceived lack of transparency and accountability.
In order to address these issues, the UK government has introduced the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (the “Regulations”) which concern all companies that entered administration on or after 30 April 2021.
A Pre-Pack sale is a sale of a company's business or assets negotiated prior to and completed on the appointment of administrators. Whilst Pre–Packs are an important rescue tool, preserving value for creditors, they have also attracted wide criticism for some time due to a perceived lack of transparency, in particular in relation to sales to ‘connected parties’, where the main concern has been that it might allow the existing management, directors or shareholders to cherry pick the assets and leave the debt and liabilities behind.
The Regulations require that administrators can only proceed with a substantial disposal of a company's business and assets to a 'connected person', within the first eight weeks of the administration, if they have either:
- Obtained the approval of a majority of creditors to the administration proposals; or
- Have received an independent written report from an ‘evaluator’.
Although this will provide creditors with an opportunity to critically consider the proposed transaction and therefore result in a more transparent process, it must be remembered that one of the main benefits of the Pre-Pack is speed. Accordingly, it is perhaps unlikely that this method will prove popular with administrators due to the time it might take for proposals to be approved. In addition, directors may not want to risk creditor dissent. It is therefore likely that a written report from an evaluator will be the route taken in most administrations.
A written report must be obtained by the “connected person” from someone who has the requisite knowledge and experience to provide the report and has valid professional indemnity insurance in place. The evaluator must be independent of the connected party buyer, the company and the administrators and must meet certain eligibility requirements. Their report will confirm whether or not the evaluator is satisfied that the consideration being paid and the grounds for the substantial disposal are reasonable in the circumstances. Where the evaluator is not satisfied, the administrators can nevertheless proceed with the disposal but must provide reasons for their decision.
A copy of the report must be sent to creditors of the company and Companies House when the administrators send a copy of their proposals.
The Way Forward
The creditor approval route should address concerns regarding transparency but, as we have commented above, we believe this will be rarely used. In cases where it is not there should be comfort for creditors in the independent report but this comes at additional cost, with the potential for delay and, it might be said, with some scope for abuse.
It currently remains unclear who can or cannot act as an evaluator or what constitutes a valid reason for administrators to proceed with the disposal in case of an unfavourable report from the evaluator. It will be interesting to see going forward whether evaluators’ reports are challenged in the Courts by dissatisfied creditors and whether these changes increase creditor confidence in the Pre-Pack process. The government has already stated that it may pursue further reforms or even ban the use of Pre-Packs entirely if the Regulations do not tackle the perceived shortcomings of the current process.
For more information, get in touch with our expert restructuring and insolvency solicitors.