How will The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 affect the sales of assets in administrations? Caroline Clark of RMCSC looks at the new legislation and ‘pre-packs’.

What are pre-pack sales?

Pre-pack sales, sometimes referred to as ‘pre-pack administrations’, typically take place shortly after a company goes into administration and are effectively a going concern sale. The negotiations leading to the sale take place before the company goes into administration, therefore these sales are known as 'pre-pack' sales. The transaction is 'pre-packed' and negotiated before the company goes into administration.

Pre-pack sales have been developed by the insolvency profession as a very successful technique for protecting, as much as possible, the business and employees of a company in severe financial difficulties which cannot avoid a formal insolvency procedure that will ultimately result in the company ceasing to trade.

What are the problems with pre-pack administration?

In the days of administrative receiverships, a going concern sale was seen as a major achievement for the administrative receiver. More consideration was received from the assets in a going concern sale than in a breakup sale, which would be to the benefit of creditors, and a going concern sale resulted in fewer, if any of the employees being made redundant. A going concern sale that was achieved promptly after the business had been marketed would be even more beneficial for creditors as this minimised the cost of post receivership trading.

The perception of pre-pack sales, however, can be much less positive. Creditors and other stakeholders are often concerned by:

• the speed with which the sale is completed after the company goes into administration
• the apparent lack of transparency concerning the negotiation and the marketing of the assets and the decision to accept the pre-pack offer, which, on occasion but not always, may be from directors of the company in administration or people connected to it

As such, pre-pack administrations have been investigated in the past. Following the Graham review in 2014, changes were introduced and the insolvency profession continued to juggle the competing requirements of compliance, transparency, commerciality and working for the benefit of creditors.

Despite this, pre-pack sales were still widely mistrusted and new legislation was introduced from 30 April 2021 in another attempt to resolve the problem.

What is the new pre-pack administration legislation?

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (ARR2021) applies to all substantial asset sales that take place in an administration within eight weeks of appointment and that are to someone connected with the company.

Pre-pack sales are not specifically mentioned in ARR2021 – the new legislation is drafted much more widely to include all substantial asset sales within eight weeks of the date of administration. This will include all pre-pack sales and is likely to include the majority of going concern sales in administrations, whether the negotiations started before the date of administration.

ARR2021 applies to substantial asset sales within the relevant time period that are to a 'connected person', which are defined in Para 60(A)(3) Sch B1 Insolvency Act 1986 and include a company connected with the company, a director, other officer or shadow director of the company and a non-employee associate of such a person or of the company. 

ARR2021 applies to all substantial asset sales to people connected with the company that take place within eight weeks of the date of administration, but it includes more than just the old pre-pack sales where a sale was negotiated before administration and completed shortly after administration. This is important and should be remembered by officeholding Insolvency Practitioners and those working for them as ARR2021 and future regulation of compliance with it will not be limited to pre-pack sales.

It is also important to note that SIP 16, which has been amended as a result of ARR2021, still only applies to pre-pack sales to connected parties.

From 30 April 2021, substantial assets sales to persons connected with the company may only take place within eight weeks of the date of administration if the sale has been approved by creditors, or if the proposed sale has been reviewed by an evaluator who has provided a qualifying report.

What is the role of the evaluator?

The ‘evaluator’ is another role introduced by ARR2021, though it can be seen as a development of the previous Pre-Pack Pool, created to provide the opportunity for the objective review of prepack sales.

Obtaining a report from the Pre-Pack Pool was never mandatory and as a result it was very underused, possibly one of the reasons why many creditors remained suspicious of pre-pack sales, even after the changes brought in after the Graham review.

ARR2021 defines an evaluator as an independent individual who is satisfied that they have the relevant knowledge and experience to make a qualifying report and who has professional indemnity insurance in respect of potential liabilities to the administrator, the connected person, creditors and any other person as a result of or arising from the evaluator's qualifying report.

The role of the evaluator appears to be very important; using the evaluator is likely to be the most efficient and commercially sensible way of having a proposed substantial asset sale approved. The evaluator seems to be charged with restoring trust in the sale of assets in administrations to people associated with the company.

It is for the offeror (the proposed purchaser) to instruct an evaluator to review the proposed sale. The evaluator, according to ARR2021, must produce a qualifying report that includes a statement that either the evaluator is satisfied that the consideration for the relevant property and the grounds for the substantial proposal are reasonable in the circumstances or that the evaluator is not so satisfied.

The qualifying report is to be considered by the administrator, but even if the evaluator concludes that the proposed sale is not reasonable the administrator may continue with it. In this case the administrator, as well as sending a copy of the qualifying report to all the creditors, must also advise creditors of the administrator's reasons for proceeding with the substantial disposal in spite of the evaluator's conclusion.

What effect will the introduction of evaluators have in asset sales in administrations?

Reg 9 of ARR2021, which allows the administrator to proceed with a substantial asset sale to someone connected with the company within eight weeks of the date of administration (even if the evaluator has concluded that the sale is not reasonable) seems to restrict the role of the evaluator to one very similar to that of the Pre-Pack Pool.

The use of the Pre-Pack Pool was not mandatory, and as a result it was not able to achieve its full potential. Some form of approval for a relevant asset sale is now mandatory, the qualifying report, but the administrator may ignore the evaluator's report if there is a reason for this that can be reported to creditors.

Reg 7 of ARR2021 gives the required content of the qualifying report and it is limited to information about the transaction and the evaluator's professional indemnity insurance, qualifications and experience. The evaluator would accordingly review the proposed transaction and although the evaluator may ask the administrator for information, the role of the evaluator, as defined by the legislation, does not include reviewing the actions and decisions of the administrator, such as the marketing of the assets. 

If creditors and other stakeholders are depending on the evaluator to restore trust in asset sales in administrations, this may not be possible when the evaluator's conclusion can be ignored by the administrator and the evaluator's role seems limited to the review of the terms of the proposed asset sale.

It will be interested to see if office holding Insolvency Practitioners who are keen to show that they act in good faith encourage prospective purchasers who are also connected persons to instruct evaluators who prepare qualifying reports that also address the wider concerns regarding substantial asset sales in administrations. 

About the author

Caroline Clark is director of RMCSC, a fellow of the Insolvency Practitioners Association and R3, and has an MBA. She established RMCSC in 2013, providing consultancy advice for insolvency practitioners about compliance with insolvency and anti-money laundering legislation.

See also

The pros and cons of pre-pack administration for insolvent companies

Insolvency practitioners' remuneration following the introduction of the new SIP 9

Find out more

Graham review into Pre-pack Administration (GOV.UK)

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (Legislation)

Insolvency Act 1986 (Legislation)

SIP 16 (Insolvency Practitioners)

Pre-Pack Pool (PPP)

Image: Getty Images

Publication date: 18 June 2021

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.