New Pre-pack administration legislation approved

The Government has confirmed the passing of new legislation on pre-pack administrations.

The new pre-pack legislation will take effect from the end of April 2021, introduces mandatory independent scrutiny of pre-pack administration sales where connected parties are involved.

Under it, an administrator will be unable to make a ‘substantial disposal’ of company property (including hiring out or sale) to a person connected with the company within the first eight weeks of the administration if they haven’t received either the approval of creditors or an independent written opinion, such as a qualifying report.

The independent written opinion will be provided by an ‘Evaluator’, a newly created role, which will involve reviewing the pre-pack proposals and determining whether a to a connected party is fair and appropriate.

If neither the Evaluator nor the creditors support the proposal for a substantial disposal, the legislation does allow an administrator to proceed with the sale, but they will need to provide a statement that explains their reasons for doing so.

A pre-pack is where the sale of a company’s business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. The point of a pre-pack is to maximise what can be repaid to an insolvent company’s creditors by obtaining the maximum sale price of a company’s business or assets.

All pre-packs are overseen by a licensed insolvency practitioner, who acts as the administrator and is responsible to a company’s creditor body as a whole, not its directors nor one particular creditor. The administrator must show in their report to creditors that a pre-pack was the best option in the circumstances.

 Sometimes a pre-pack might involve a sale to someone with a pre-existing connection to the insolvent company. This is known as a ‘connected party’ sale. A connected party could be a director or company owner (secured creditors are not considered to be connected parties).

Where sales to connected parties occur, it is because this would have been the most effective way of maximising returns to an insolvent company’s creditors. The connected party may have offered the best price for the company’s business or assets, or their involvement in the business is crucial to the business’ value- they might own important intellectual property, for example.

Commenting on the new legislation Colin Haig, President of insolvency and restructuring trade body R3 and Head of Restructuring at Azets said “We welcome efforts to improve stakeholder confidence in pre-packs, but it may be proved that this legislation has missed the mark..”

“Sales to connected parties in pre-pack administrations will now be subject to creditor approval, or review by the new independent Evaluator position. The rationale for this is clear but the practicalities around ensuring that an Evaluator is a fit and proper person is where these regulations could fall down.”

“These regulations effectively leave it to the market to regulate the Evaluator position. A far better alternative would have been for the Government to agree to maintain a list of approved Evaluators.”

“This might have meant an additional administrative burden for them, but it would have given stakeholders greater confidence that these reforms were robust rather than just the easiest option for the Government.”