Tougher regulations on connected party pre-packs to take effect

read timeRead time: 3 mins

New rules apply to all Administration appointments that commence from 30 April 2021

Draft legislation published in February 2021 entitled Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 has passed through Parliament and will apply to all Administration appointments that commence from 30 April 2021.

These amendments follow a Government review into ‘Pre-packs’ which concluded that they were a valuable part of the insolvency framework, but greater transparency and independent scrutiny was needed in respect of connected party sales.

What is a ‘Pre-pack?

A ‘Pre-pack’  refers to the disposal of a business/business assets immediately or shortly after the appointment of an Administrator.  In practice, this means an insolvency practitioner (“IP”) is instructed by a company’s board to find a buyer for its business some time before the IP is formally appointed Administrator and the formal insolvency process commences. Typically the Administration will only begin when a buyer has been found and contracts agreed, so that the first action of the appointed Administrator is to complete the sale.

The term ‘Pre-pack’ has however often become colloquially used as the name of a process of selling an insolvent business back to management through the Administration process.  The new regulations are specifically aimed at regulating this particular practice.

What are the new pre-pack regulations?

An Administrator will not be able to complete a sale, hire out or dispose of a company’s assets (or a substantial part of them) to a connected party within 8 weeks of the Administration Order unless he/she obtains the following:

  • the approval of creditors, or
  • an independent written report.

These new regulations don’t just cover ‘Pre-pack’ sales but all connected party sales. The Administrator will have to decide whether a sale is “substantial” and will presumably be expected to explain their reasoning to creditors. For instance, asset sales made over a number of smaller transactions would be captured by the Regulations.

Creditor approval for sale

This would be sought as part of the normal statutory process undertaken by Administrators when they seek creditors’ approval for their Proposals (i.e. strategy for the Administration), via a vote by correspondence.

Independent written report

If creditors’ approval is not sought by the Administrator then the purchaser can obtain an independent report commenting upon the proposed transaction. The person providing the report (the ‘Evaluator’) must be independent, have sufficient knowledge and expertise, and have professional indemnity insurance.

As part of the independent report, an Evaluator must state whether they are satisfied that the price paid for the assets and the grounds for the transaction are reasonable in the circumstances.  What the Regulations do not insist upon, however, is that a transaction can only go ahead if the Evaluator is satisfied that the criteria are met.  In such circumstances an Administrator can still proceed with the transaction but must provide a statement, presumably in the report to creditors, justifying why the sale should complete.

The purchaser may obtain multiple Evaluator reports, presumably until a positive report is secured, however the Regulations state that an Evaluator must inform creditors that these previous reports had reached negative conclusions.

A copy of the Evaluator’s report must be filed at Companies House and sent to all creditors along with the Administrator’s Proposals.