Pre-packs sales are an important arrangement within Administrations and insolvency law. However, their usage has sometimes been considered “controversial”. In response to criticism and following a recent review of existing industry measures, the Government introduced The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (“the Regulations”). Coming into force on 30 April 2021, the Regulations will provide a new legal framework for pre-packs.
This article outlines how the Regulations will change the law in this area and consider whether this will alleviate the “controversial” elements of pre-pack sales.
What is a Pre-Pack?
A “pre-pack sale” is an arrangement where a sale of all or part of a company’s business and assets is negotiated with a buyer prior to the appointment of an Administrator. That sale then completes either immediately following the Administrator’s appointment or a short time afterwards.
Pre-packs have long been a useful tool for an insolvency officeholder to rescue a business as a going concern, enabling them to maximise the value of a company’s assets realised for creditors, whilst also saving jobs. However, pre-packs are considered by some to be “controversial”, particularly when the business and assets are sold back to a “connected person”, such as to one or more of its directors, shareholders or a company / business where those parties are directors or involved in its management.
This has led to arguments that pre-packs lack transparency and prejudice the rights of creditors.
After a review of pre-packs in 2015, the Government introduced the “pre-pack pool” to try and alleviate those concerns. This allowed a proposed pre-pack sale to a connected party to be reviewed by an independent person within the “pool” to provide an opinion whether the proposed sale was reasonable.
However, as the “pre-pack pool” was not compulsory, referrals to it were low.
New Regulation of Pre-Packs
As such, the Regulations apply to Administrations:
- which commence on or after 30 April 2021; and
- where the Administrator seeks to dispose of all or a substantial part of the company’s assets to:
- a “connected person;” and
- within 8 weeks of the commencement of the Administration
In those circumstances, either:
- the Administrator must obtain the approval of the creditors before the sale can complete; or
- the buyer must obtain a written “qualifying report” from an Evaluator on whether the grounds and consideration for the disposal are reasonable.
Prior Creditor Approval
The main factor of a pre-pack is that it is an accelerated transaction designed to maximise asset values and business continuity. That means that if an Administrator wishes to seek prior creditor approval for the proposed pre-pack under the Regulations, they will need to refer to the intended sale within their proposals to creditors (sent within 8 weeks of their appointment) and seek creditor approval of those proposals before the sale could completed.
Given the timing constraints involved, Administrators would only be able to seek creditor approval in this way if the circumstances allowed for them to circulate their proposals promptly whilst they traded the business themselves pending creditor approval. That comes with the risks associated with trading a business, with the possibility that creditors could reject the proposed pre-pack.
This is likely to mean in many cases that this option is not practical.
It means that in most cases, the proposed buyer will need to obtain a “qualifying written report” from an Evaluator. The Regulations provide that an Evaluator must have relevant knowledge and independence and have professional indemnity insurance in place before acting as an Evaluator. Parliament envisaged when it drafted the Regulations that the Evaluator may be a solicitor, accountant or another insolvency practitioner. The Evaluator must state in their report if they consider the grounds, and the proposed consideration, to be reasonable or not.
A negative report does not prohibit the proposed Administrator from completing the intended pre-pack sale to the connected party. The officeholder will therefore need to exercise their independent skill and judgement whether to proceed with a pre-pack in those circumstances, particularly if they are faced with an unfavourable report, having conducted a marketing exercise and there is no other party interested in acquiring the business and assets of the company.
As it is for the buyer to select the Evaluator, the proposed Administrator and their own compliance team will no doubt want to have confidence in the person chosen to prepare the report and that they meet the criteria set out in the Regulations. As it is intended that the former members of the pre-pack pool intend to provide evaluation services for the purposes of the Regulations, it may well be that the intended Administrator will seek to direct the buyer to them.
- More information on this can be found on the pre-pack pool’s website here.
- In anticipation of the commencement of the Regulations, a revised SIP 16 has been issued for insolvency practitioners, which can be found here.
Should insolvency officeholders or proposed purchasers require specific advice regarding their position, they should not hesitate to contact professional advisors, such as those within Keystone Law’s Restructuring and Insolvency team.
Should you have any queries arising out of this article, please do not hesitate to contact Stephen Young.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.