UK Government proposes stricter scrutiny on pre-packaged administration sales to connected parties

In a move to increase confidence in the insolvency regime, the UK Government has proposed new measures to improve transparency in pre-packaged administration sales where there is a disposal in administration of all or a substantial part of the company’s assets and it is made to a connected party within the first eight weeks of the administration. Pre-pack sales are a critical rescue tool which account for over a quarter of all administrations and often enable a significant number of jobs to be saved, as well as preserving business continuity and mitigating the damage to brand. Pre-packs have however often made the headlines over the years, especially in circumstances where the business is sold back to the existing directors in a ‘phoenix’ sale, leaving behind the creditors.  

In order to address some of these ongoing concerns, the relevant statement of insolvency practice (SIP16) requires administrators to include a statement within their proposals (which are filed at Companies House) explaining why a sale transaction took place and what alternatives were explored. In addition, the Pre-Pack Pool was introduced in 2015 with the aim to increase the transparency of the pre-pack sales process involving connected parties and to provide assurance for creditors that independent business experts have reviewed the proposed transaction.  However, since its creation it has not been widely used, with referrals to the Pre-Pack Pool being as low as 9% in 2019, possibly due to its voluntary nature. It is therefore unsurprising that the government is re-visiting the strategy for connected party pre-pack administration sales and has reported that “introducing new regulations to ensure an independent opinion, or creditor approval, of the pre-pack sale is obtained will positively build on the existing voluntary measures and will help to mitigate any adverse consequences in the increased use of pre-pack sales arising from the pandemic.”

It is proposed that the advance scrutiny take the form of either approval by creditors (by way of decision procedure) or by way of an independent Evaluator’s report. The following criteria is to apply with respect to the Evaluator’s report:

• the connected person (rather than the company/prospective administrators) should obtain the report, irrespective of their level of knowledge of the company;
• the Evaluator cannot be the administrator or connected with a company with which the administrator is connected;
• the Evaluator is qualified to provide the report if they believe they have the requisite knowledge and experience to provide the report;
• the administrator must consider the report and have no reason to believe that the Evaluator does not have the requisite knowledge and experience to decide whether the consideration and the grounds for the substantial disposal are reasonable in the circumstances; and
• the Evaluator must be independent, not be connected with the company or otherwise have a conflict of interest with respect to the disposal, including having advised the company in respect of corporate rescue or restructuring in the prior 12 months.

The report must be sent to the creditors of the company with a statement from the administrator setting out the reasons for proceeding with the disposal. As with the Pre-Pack Pool opinion, the administrator may still decide to proceed with the sale even on receipt of a negative report. However, unlike the Pre-Pack Pool, whose opinion is generally provided within two business days, the provision of the Evaluator’s report is expected to take longer. This could potentially hinder the often very tight timescales associated with, and necessary for, a pre-pack administration sale.

The Government has advised that they will work with the insolvency profession to prepare guidance to accompany the regulations and to ensure that SIP16 is compatible with the legislation. It will also look to strengthen the existing regulatory requirements to improve the quality of information provided to creditors.

The regulations must be introduced before the end of June 2021 and over the coming months there will likely be a lot of commentary from the insolvency officeholder community and other stakeholders on the shape of the regulations.