In a long-anticipated change, connected persons buying all or a substantial part of a company's business or assets from an administrator appointed on or after 30 April 2021 will be required to obtain an independent written opinion from an evaluator, pursuant to The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021. This is the latest attempt to restore public confidence in pre-pack sales following the very limited take up of the voluntary Pre-Pack Pool referral system introduced in 2015.
Connected persons purchasing a business from an administrator will now need to factor into their transactions the additional time and cost it will take to obtain the independent opinion. The greater impact is likely to be felt in the SME market, where voluntary Pre-Pack Pool applications have been less common, perhaps due to the greater relative cost of obtaining an opinion. For the higher value and more complex transactions, we have often seen insolvency practitioners insist upon the referral to the Pre-Pack Pool as a condition to their appointment since its inception and notwithstanding its voluntary nature, so the new regulations may not seem like such a significant change.
Political interest in pre-packs remains high, and the government will be closely monitoring the operation of the new regulations. The message is that further action to regulate pre-packs will be taken if deemed necessary.
Will the increased scrutiny required by the new regulations be enough to build faith in the pre-pack sale process? There are a number of areas in which the regulations are arguably deficient and, in particular, the qualification requirements for the evaluator under the new regulations are weak. There are concerns that this could be exploited, undermining the increased rigour that the regulations are intended to bring. That said, it's reassuring to see that the Pre-Pack Pool will be adapting to provide evaluator opinions. The independence of the Pre-Pack Pool members, together with their past experience, consistency of approach and support from creditor bodies and the insolvency practitioners' regulated professional bodies (RPBs), should stand them in good stead to become the go-to evaluators, at least initially. Their fixed cost of £1,500 plus VAT should also mean that they remain competitive and accessible in the SME market, where there will be the greatest volume of connected person sales alongside a more acute focus on cost. We expect a number of administrators to insist on the instruction of an evaluator from the Pre-Pack Pool for these reasons.
The first few connected person sales under the new regime will no doubt be closely scrutinised by MPs and the media, as well as the restructuring and insolvency industry, but it's hoped that the enhanced transparency supported by the reforms will lead to a wider acceptance of pre-packs as an important tool to preserve value and jobs. This is vital now more than ever, given the large number of corporates expected to require restructuring as we head out of the pandemic, and the use of the pre-pack particularly by SMEs as their restructuring tool of choice. Our economy cannot afford to lose pre-pack administrations as a restructuring tool.
| What do the Regulations Require? |
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The final regulations have not substantially changed since we originally analysed the draft legislation last year, and a brief reminder of their requirements is as follows:
- The regulations apply to disposals, leases or sales of all or a substantial part of a company's business or assets to one or more connected persons (including disposals effected by a series of transactions) within the first 8 weeks of an administration. This is broader than what we ordinarily think of as pre-pack sales.
- The definition of 'connected person' is set out at paragraph 60A(3) of Schedule B1 of the Insolvency Act 1986. Employees are excluded from this definition, which is otherwise broadly equivalent to the definition of 'connected' under section 249 of the Insolvency Act 1986. While it was hoped that secured lenders who hold security over more than one third of the company's shares (with related voting rights) would be expressly carved out of the definition of 'connected person', as was the case under the voluntary regime, the Insolvency Service did not accept this amendment to the regulations. Notwithstanding this, the regulations do not catch all such secured lenders – only those who have assumed control of the voting rights under their security – and so the lack of a carve out in the regulations may not cause much of a problem for secured lenders in practice.
- Where an administration sale falls within the regulations, before completing the sale, the connected purchaser will have to obtain an independent written opinion or, alternatively, the administrator can obtain creditor approval. Typically, the independent opinion option will be much quicker and therefore preferable.
- The provider of the independent opinion (known as the 'evaluator') must state that either the case is made for the sale (i.e. that the consideration payable for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances) or it is not, with reasons for their conclusion.
- To act as an evaluator, an individual must have professional indemnity insurance and the administrator must be satisfied that they have sufficient relevant knowledge and experience. Independence and fitness for office requirements also apply. In practice, the evaluator role is likely to be performed by members of the Pre-Pack Pool or valuers, surveyors, accountants and insolvency professionals.
- Where the evaluator finds that the case is not made for the sale, the administrator will still be able to proceed with the sale as long as they set out their reasons for doing so. It will also be open to the connected person to obtain a further independent opinion from another evaluator, though details of any previous reports should be contained in later independent opinions.
- Copies of the independent opinion (and administrators' reasons for proceeding despite a 'case not made' opinion) will have to be sent to all creditors and Companies House with the administrators' proposals.
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