New Pre-Pack Administration Regulation – A Relief or a Worry for Creditors?

New Pre-Pack Administration Regulation – A Relief or a Worry for Creditors?

Key Contact: Aisha Wardell

Author: Evangeline O’Dowd

What is pre-pack administration?

Dubbed as “pre-pack”, a pre-negotiated administration sale is simply the sale of a company’s business or assets prior to entering into administration. Seemingly, it is completed shortly after the administrator is appointed. In short, this is a highly effective and extremely useful tool when rescuing a business due to the lack of advertisement and ability to preserve connections with company members, while minimising administration expenses. Given the speed of the transaction, creditors often do not know about the sale or purchaser’s details until after the sale is complete. Whilst the benefits are apparent, the quick sale has the potential to antagonise creditors due to the lack of visibility, transparency, and potential shortfall of monies.

In recent years, the Government have sought to bridge the gap and alter creditor’s perceptions. In its quest and subsequent to ‘Draft Regulations’, the Government passed The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (“Pre-Pack Regulations”), in the hope of addressing creditor’s concerns. The Explanatory Memorandum accompanies this regulation and offers further clarification of the changes.

What are the changes
Substantial disclosure within 8 weeks of administration

From 30 April 2021, an administrator will be unable to make a substantial disposal of a company’s business and assets to a ‘connected person’ within the first eight weeks of the administration, without either the approval of a majority of creditors or an independent written report from an evaluator. In short, creditor approval or a report from a third-party evaluator must be sought before the administrator can sell the business or assets to a connected company.

Evaluator

Subject to some criticism, there is no requirement for the evaluator to possess professional qualifications, other than professional indemnity insurance. Rather, the evaluators will have to self-assess whether they deem themselves as having sufficient relevant experience and knowledge to make the qualifying report. Further, the report must be made by an independent evaluator chosen by the purchaser, who is not excluded under the regulations. Some exclusions include: an associate of the administrator or uncharged bankrupts.

In making the report, the evaluator must be satisfied that the consideration offered for the business or assets and the grounds for disposal are reasonable and equitable in the circumstances. Further guidance and assistance for evaluators is provided in the Explanatory Memorandum.

Although the administrators are not bound by the evaluator’s report recommendations, the administrator will have to justify their reasons for diverging from the recommendations by way of a report to the creditors and to the Registrar of Companies. Comparably, the potential buyers need not be bound by the opinion they have obtained and can contain multiple reports. However, parties are discouraged from obtaining multiple reports due to the ability to potentially source more favourable reports. Further, all opinions contained within earlier reports must be disclosed.

Impact

In light of COVID-19, it is hoped that the new regulation will improve and refine confidence within the business domain. In view of the Government addressing the transparency concerns, it is hoped that businesses will now consider the value of pre-packs as a rescue option. Some ambiguity still exists regarding the ability to obtain multiple reports and the lack of professional qualifications needed for evaluators. Only time will tell how these concerns pan out in practice and whether they produce the desired effect of balancing and protecting the interest of creditors with the need to promote company rescue.

It will be interesting to see who will fulfil the evaluator role and how the additional costs and delays in obtaining evaluators recommendations will impact pre-pack sales. With all this in mind, the new regulation is certainly a welcome development in the pre-pack landscape.

If you require support and tailored legal advice on the insolvency rules to businesses and directors, please get in touch with our litigation team who will be able to talk you through the options available to you.

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