Following much commentary and debate in recent years new legislation on pre-pack administrations will come into force on 30th April 2021.
The government feels that if the process is better explained to creditors then this transparency will help them understand and accept the transaction, particularly where the sale is to someone deemed to be a “Connected Party” (typically the existing management team, directors, or shareholders).
We ask Neal Errington, Director at Advantedge to explain the new legislation and give his view on what difference it will make to the parties involved.
What are PRE-PACKS?
A pre-negotiated administration sale (“pre-pack”) is the sale of a company’s business or assets that is negotiated prior to and completed on the appointment of an administrator.
It is common for purchasers in this scenario to be “connected parties” and it is often the case that trade creditors are unaware of the sale or identity of the purchaser until completion.
One of the key discussion points in recent times has been that unsecured creditor claims are “left behind” with the old company, leaving many suppliers out of pocket. Whilst pre-packs can be an extremely useful tool for rescuing a business as a going concern and preserving creditor value, a lot of criticism has been directed at their lack of transparency and accountability and disadvantaging of creditors.
WHAT IS CHANGING?
The new law, known as the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, applies to pre-packs which meet all of the following criteria ;
A disposal, sale or hiring out or of all or a substantial part of the company’s business or assets (via one or more transactions);
The sale is completed within 8 weeks of the commencement of the administration;
The sale is to a “connected party”.
The definition of a “connected party “ covers a lot of ground but in summary it is:
If an individual buys the business or assets; the purchaser is connected if they are a “relevant person” – which includes directors (including shadow directors), other officers, any of their non-employee associates, and any non-employee associate of the company (e.g. shareholders with a holding in excess of 30%)
If a Company buys the business or assets; the purchaser is connected if any of the above “relevant persons” is or has ever been a relevant person of the purchasing company as well as the company.
So, sales to a connected party are not banned but such sales require the Administrator to ensure that they have either been approved in advance by the creditors or been the subject of an Evaluator’s Report. Furthermore, the Administrator is likely to require full disclosure of all relationships between the company looking to go through a pre pack and any proposed buyers.
The Evaluator is a new role, they must be independent of the connected party, the company and the administrator and meet certain eligibility requirements. There are no specific qualifications required to become an Evaluator, but they must believe they have the requisite knowledge and experience to produce the report and hold professional indemnity insurance.
While an Administrator is not bound by the Evaluator’s recommendations, they will have to justify to the creditors if they decide not to follow these proposals.
As speed is often critical in a pre-pack , it is widely anticipated that the main route to compliance with the new law will be to obtain an Evaluator’s report rather than seeking creditor approval.
What are the key changes and what will they mean?
Currently an administration and buy-back turnaround (i.e. a Pre Pack) can happen on the same day and the process does not require creditors consent, nor is it overseen by an independent evaluator.
There is concern amongst some industry professionals that the lack of qualifications required by an Evaluator means there is a risk that the more lenient Evaluators will be favoured over those considered more stringent.
Finally, as previously stated the Evaluator’s Report will not be binding and if neither they nor the creditors support the proposals then the regulations will still allow an Administrator to proceed. However in such an instance there are extra administrative layers and the Evaluators Report must be sent to the Registrar of Companies and all creditors along with a justification of the Administrators decision to proceed.
Time will tell whether the new Pre-Pack Regulations will go far enough to address the current concerns of creditors.