The Regulation of Pre-Pack Disposals
The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 will come into force on 30th April 2021 and apply to Administrations commenced on or after 1 May 2021
The Regulations prohibit an administrator making a substantial disposal of what he considers to be all or a substantial part of the company’s business and assets to connected persons within 8 weeks of the commencement of the Administration unless one of two exceptions apply.
The first exception requires the Administrator to obtain creditor approval by putting forward the disposal in his Statement of Proposals under paragraph 49 of Schedule B1 to the Insolvency Act 1986 or by way of a separate decision-making process. The creditors can approve of the proposed disposal without modifications or with modifications to which the Administrator consents.
The second exception requires the connected person to obtain a written Qualifying Report (“QF”) by an Evaluator and submit it to the Administrator for his consideration.
The Evaluator must be independent of the connected person and consider himself to have the relevant knowledge and experience to make the report. He is required to have professional indemnity insurance against liabilities to the Administrator, the connected person, and creditors. Certain individuals are excluded from acting as Evaluators, such as those with convictions for dishonesty, former bankrupts, and those subject to a disqualification order under the Company Directors Disqualification Act 1986.
The QF must state the nature and value of the consideration for the disposal, identify the connected person, and state that the consideration and grounds for the substantial disposal are reasonable (or that they are not). The QF should set out the reasons and evidence relied upon.
The Regulations also provide additional requirements where a connected person obtains more than one QF. The connected person is required to inform an Evaluator whether he has obtained an earlier QF and the Evaluator must give details of that report or explain why it has not been obtained.
The Administrator is required to send a copy of the QF to the Registrar of Companies and all creditors after completing the disposal and at the time he is required to file and circulate his Proposals.
A negative QF ( stating that the grounds for disposal or the consideration are not reasonable) does not prevent the Administrator from completing the disposal but if he proceeds, he must make a statement setting out his reasons for doing so.
Pre-packs have become increasingly popular in recent years and are a valuable means for achieving a rescue of a business as a going concern. A quick and efficient pre-pack Administration can preserve value for creditors, save jobs and avoid costs. Nevertheless, due to a perceived lack of transparency and accountability, creditor criticism intensified as the process became more common . There have already been several attempts at reform, including the Graham Review in 2014 which introduced the Pre-Pack Pool and a revised Statement of Insolvency Practice 16, introduced in 2015. The fact that the government considers more regulation necessary reflects poorly on the achievements of those measures. The success of the Regulations seems to rely on the integrity of the Evaluators which are not required to have any professional qualification. Perhaps the requirement for insurance will introduce a degree of quality control by the insurance industry itself.
Most notably, the Regulations only apply to Administration and other forms of seamless restructure through different insolvency procedures will continue unaffected.