Pre-pack Administration – New Regulations

Koomooda V Virasami

City, University of London

What is a pre-pack? 

A pre-pack administration is when a business is sold by an administrator to a management or third-party purchaser either immediately upon or within a few days of their appointment. Upon the administrator’s appointment, the business is sold to existing directors as a going concern. This is a preferred solution to many companies as it allows the business to continue trading without too much disruption and usually without the loss of trade or jobs.  

However, pre-pack administration can be controversial as the sale is usually agreed before the appointment of the administrator, unlike a regular administration. Pre-packs often involve the business and assets being sold back to the current directors via a new company. Hence, the main concerns about pre-packs are the lack of transparency, accountability, and the interests of creditors.  

New Regulations 

To deal with some of the criticisms of pre-packs, The Administration (Restrictions on Disposal, etc to Connected Persons) Regulations 2021 has been introduced by the Government. The main aim is to reassure creditors that the pre-packs to connected persons are fair and transparent. These Regulations apply to all administrations that commence on or after 30 April 2021 and an administration commences on the appointment of an administrator or the making of an administration order.

The new conditions introduced by the Regulations

3.— Conditions and requirements that apply in respect of a substantial disposal by the administrator 

1. An administrator must not make a substantial disposal unless either one of the following two conditions is met— 
2. the approval of the company’s creditorsfor the making of that disposal has been obtained in accordance with regulation 4, or 
3. a qualifying reportin respect of the making of that disposal has been obtained. 

The Regulations will apply where there is a disposal, hiring out or sale to one or more connected persons during the first 8 weeks of the administration without either the approval of the creditors or a ‘qualifying’ report.  

Substantial disposal  

Although the Regulations do not define substantial disposal, it is expected to have the same considerations used generally in insolvency legislation. To determine whether the pre-pack sale is a substantial disposal the value of the business and assets involved should be considered and the percentage that is being sold as part of the disposal. In case of doubts, a report could be asked from the purchaser.  

Creditors’ approval  

The administrator will need to include a statement in their proposals that they are required to send to the creditors to seek their approval. The approval should either be without any modification to the proposal or if any, the modifications to which the administrator consents.  

This provides greater transparency as the creditors are given the chance to inspect the transactions, but it seems unlikely that the creditors will be regularly asked to approve the transactions. Furthermore, will the creditors be able to understand the proposals without any specialist advice? 

Qualifying report 

The connected buyer will be required to obtain the qualifying report, and this can be obtained before the appointment of the administrator but not after the completion of the sale. The connected person can be a director, shadow director, or an officer of the company.  

The evaluator 

It is the connected purchaser who has to obtain the report, but it is the duty of the administrator to make sure that the evaluator has the relevant knowledge, experience, and independence to make such a report. Although the evaluator is not required to hold any professional qualifications, he/she must have professional indemnity insurance. The administrator can rely on the evaluator’s statement regarding their knowledge, experience, and independence and can request further supporting information if there is any concern.  

The idea behind the new Regulations was that the evaluator would be a solicitor or an insolvency practitioner but a non-qualified person, or someone without any insolvency experience, could also be the evaluator. It is largely up to the administrator to decide whether he is satisfied with the level of qualification of the evaluator. The administrator will also have to make the necessary enquiries to ensure that the evaluator is independent, that is, not connected to the company or an associate of the connected person and there should be no conflict of interest.  

The written report will contain either a statement that the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for substantial disposal are reasonable in the circumstances or that the evaluator is not satisfied. The report will include the evaluator’s reasons behind the statement given and a summary of the evidence relied upon to reach such a conclusion.  

More than one report may be obtained. Although the administrator should consider the report, where the report contains a case not made opinion, he can still proceed with the disposal so long he provides a statement with the reasons for doing so.  

Furthermore, an administrator is required to send a copy of the report(s) to the creditors of the company and the Companies House at the same time he sends a copy of its statement of proposals, that is, no later than 8 weeks  

Comments 

The report by an independent evaluator is useful for the administrator to have an independent review of the transaction. However, the administrator is not bound to accept the evaluator’s opinion and there is clearly a risk of ‘opinion shopping’ as a purchaser may request subsequent reports until he obtains a favourable one. Obtaining several reports will be time-consuming and involves a high degree of risk undermining the main reasons behind pre-packs being quick and efficient sales.  

Furthermore, the evaluator can declare himself eligible given that there is no requirement for any formal qualification. 

Conclusion 

The new Regulations attempt to deal with the criticisms related to pre-packs but there are some uncertainties. The Regulations do not set out a penalty for non-compliance with the new conditions. The non-satisfaction of the new requirements could be ground for a misfeasance finding and other professional consequences, but the regulations do not suggest that the disposal itself could be undone. The Government said that the operation of the Regulations will be monitored and where necessary, there may be a ban on pre-pack sales or a modification of the Regulations. It remains to see whether the new conditions enhance creditor and public confidence in this insolvency tool.