Government announces plan to amend pre-pack administration measures

The Government has announced plans to amend legislation around the future of pre-pack administrations, The legislation is the next stage in their efforts to improve stakeholder confidence in connected party pre-pack administrations and follows their announcement in October 2020 that they would introduce a number of reforms to this important business rescue tool.

A key element of the reforms is the role of the Evaluator an individual who will provide an independent opinion on whether connected party pre-pack sales are fair and appropriate.

The new laws will require mandatory independent scrutiny of pre-pack administration sales where connected parties – such as the insolvent company’s existing directors or shareholders – are involved in the purchase, the government has announced today.

The government says that the new measures will improve confidence and transparency in pre-pack administration sales, giving the general public and creditors reassurance that their interests are being protected alongside that of the distressed business.

Pre-pack administrations involve arrangements to sell part or the whole of a company’s business or assets prior to the company entering into administration.

The sale is completed on or shortly after the appointment of an administrator and the speed of the transaction helps preserve the value of the business while saving jobs.

Pre-pack administration sales are widely considered to be a valuable rescue tool. However concerns have been raised that arrangements may not always be in the best interests of creditors. For example, where the sale is made to a connected party, such as the company’s directors or shareholders.

Minister for Corporate Responsibility Lord Callanan said “Pre-pack sales play an important role in rescuing viable businesses, while protecting jobs and supporting our economy.”

‘As we continue to tackle Covid-19, it is more important now than ever that people have confidence in the insolvency process.”

‘This new law will ensure all sales to connected parties are properly scrutinized – protecting the interests of creditors and the general public, as well as the distressed company.”

Responding to draft pre-pack legislation measures Colin Haig, President of insolvency and restructuring trade body R3 and Head of Restructuring at Azets said “While the amended regulations published today are an improvement on the initial legislation released in October last year, there’s still some way to go if these reforms are going to improve stakeholder confidence in pre-pack administrations.”

“In particular, there is no framework in place to ensure qualifying criteria for the Evaluator position are being met. The new requirement for an Evaluator to have Professional Indemnity insurance – which we proposed as a minimum requirement – will not be enough on its own to secure the confidence of the wider business community.

“The role of the Evaluator is being introduced to give stakeholders greater confidence that connected party pre-packs are legitimate. Not only does an Evaluator need to be ‘above board’, but they need to have relevant business experience to give an opinion on whether a case has been made for individual connected party pre-pack sales.

“We recognise the difficulties the Government faces in legislating for this, but the responsibility for ensuring the suitability of the Evaluator position shouldn’t simply be outsourced to the market to deal with. The entire point of the reforms is to ensure that there is an independent third pair of eyes’ reviewing these sales, as it stands the legislation doesn’t do enough to set the appropriate framework to guarantee that the Evaluator will fulfil that role in each instance.”

‘“One potential solution is for the Government to maintain a list of approved Evaluators. This may pose more of a burden for the Government, but it’s the only way to ensure that Evaluators are suitably qualified, and have the relevant experience, to carry out the role.”

Whilst Ion Fletcher, Director of Finance Policy, British Property Federation said “We support the Insolvency Service’s proposed measures to require independent scrutiny of sales in administration to a connected person. This will provide much-needed transparency and provide reassurance that a sale”