On 8 October 2020, the Government published its report on the findings and recommendations to improve the transparency of pre-pack sales in administration, following a review to assess the impact of voluntary industry measures introduced in November 2015. This report was accompanied by a set of draft regulations to increase independent scrutiny of pre-pack sales in administration to connected parties.
The headlines from the report were –
- An administrator will be unable to dispose of property of a company to a person connected with the company within the first 8 weeks of the administration without either;
- the approval of creditors or
- an independent written opinion (positive or negative).
- The connected party purchaser will be required to obtain a written opinion. The provider of the opinion, must be independent of the connected party purchaser, the company and the administrator, and must meet certain eligibility requirements.
R3’s response to the Government’s ‘Pre pack sales in administration’ report and subsequent draft regulations can be read here.
PUBLISHED REGULATIONS
On 24 February 2021, the draft statutory instrument of the regulations was published following a period of consultation. The regulations will now be debated in the Commons and the Lords and are expected to come into effect from 30 April 2021. It is unlikely the draft statutory instrument will be changed in anyway.
Key legislative measures
1. The regulations will apply where there is a “substantial disposal”(1) of the company’s assets by an administrator. The key phrase to note is “all or a substantial part of the company’s business or assets.”
2. 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 8 weeks of the administration WITHOUT either the approval of creditors or an independent written opinion i.e. a qualifying report (positive or negative, see below). This could involve one or more transactions.
3. Where a qualifying report states a case is not made for the support of the substantial disposal, an administrator may still proceed with the sale to a connected person(s). HOWEVER, he/she will need to provide a statement setting out their reasons for proceeding with the substantial disposal.
4. The written (electronic form included) qualifying report is to be obtained by the connected person (i.e. the purchaser) and provided to the administrator (or a copy of).
5. The independent qualifying report is to be provided by an individual, who is an evaluator, and must be independent of the connected party purchaser, the company, and the administrator. Important to note that the administrator, having regard to the date on which the report was made, must be satisfied that the evaluator making that report had sufficient relevant knowledge and experience to make a qualifying report.
6. Rather than obtaining an independent qualifying report, an administrator can seek approval from the company’s creditors. The administrator is to seek a decision of the company’s creditors when issuing their proposals referred to in paragraph 49 of Schedule B1 of the Insolvency Act 1986.
The creditors are required to approve the administrator’s proposals without modification, or with modification to which the administrator consents in order to satisfy the regulations.
Furthermore, the regulations refer to “the approval of the company’s creditors for the making of that disposal”. This suggests that where there is a further “substantial disposal” by the administrator within 8 weeks from appointment further creditor approval may need to be obtained as the initial approval was for a different disposal.
7. In this regulation “conflict of interest” means a financial or other interest which is likely to affect prejudicially the independence of the evaluator in providing a qualifying report.
8. The administrator must send to every creditor of the company, other than an opted-out creditor, a copy of the report (or, if more than one report was received, all the reports), excluding any information that, in the administrator’s opinion, confidential or commercially sensitive. This also applies when sending to the Registrar of Companies.
9. The report (or, if more than one report was received, all the reports), must be sent with (and at the same time as) the copy of the statement of proposals required to be sent to the Registrar of Companies and to creditors under paragraph 49(4) of Schedule B1 of Insolvency Act 1986.
The qualifying criteria of the Evaluator
Under the regulations, an individual will be qualified to act as an evaluator if they are “satisfied that their relevant knowledge and experience is sufficient for the purposes of making a qualifying report.”, have professional indemnity insurance, are independent and are not excluded from acting as an evaluator (see paragraph 13 of the regulations) e.g. convicted of an offence involving dishonesty or deception.
The evaluator requires professional indemnity insurance that will provide them with cover in the role of evaluator. It is worth noting that Pre-Pack Pool members have this coverage – as well as ten years of board level experience.
Furthermore, the regulations will require the evaluator to state in their written report that they have considered any previous report obtained. This is presumably to avoid connected parties ‘opinion shopping’ for the best outcome.
Qualifying report
The report must contain the following –
- A statement that the individual making the report meets the requirements for acting as an evaluator.
- A statement as to what relevant knowledge and experience the evaluator has to make the report.
- Details of professional indemnity insurance.
- Details of the relevant property associated with the “substantial disposal”.
- Disclosure of previous qualifying reports obtained by the connected party.
- Details of the nature of the consideration that is to be provided for the relevant property and the value of that consideration expressed in Sterling.
- Details of the connected party and their connection to the company; and
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Whether or not the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances, the principal reasons for reaching that decision and a summary of the evidence relied upon.
Connected person
“Connected person” is defined in paragraph 60A(3) of Schedule B1 to the Insolvency Act 1986. Included within the definition are specified “relevant persons”, including directors, shadow directors or other officers of the company, non-employee associates, as well as “connected companies”. Under that definition a company is connected with another if a relevant person in respect of one of the companies is, or has been, a relevant person in respect of the other.
Revised Statement of Insolvency Practice 16 (‘SIP 16’)
Whilst it is understood that the Joint Insolvency Committee has been working on a revised SIP 16 to accommodate the Regulations, a release date is currently unknown. However, it is expected to be released prior to the regulations coming into effect.
It is worth noting that SIP 16 may also be strengthened to improve the quality of information provided to creditors, including a greater focus on the principles of marketing and that, where no marketing has been undertaken, that this is fully explained by the administrator and any explanation probed by the regulator where necessary.
Guidance from the Insolvency Service
We expect the Insolvency Service to release guidance on the regulations in due course.
REMINDER ON APPLICATION
The regulations are expected to be come into effect from 30 April 2021.
(1) Whilst R3 and others asked for further clarity around the meaning of “substantial disposal”, the Insolvency Service considers that Insolvency Practitioners are experienced in what is ‘substantial’ and it is a term used elsewhere in insolvency legislation without further definition needed.