On 24 February 2021, the UK government published the draft bill for the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (the “Regulations”), which, once in force, will require mandatory creditor approval or an evaluator report before an insolvency practitioner (“IP”) can dispose of the company’s property by a ‘pre-pack’.
The Regulations are expected to come into effect on 30 April 2021 and we do not expect the detail in the Regulations to change significantly – but do the Regulations address concerns that stakeholders and others have expressed? To a degree, but not as far as some had hoped.
This blog sets out what an IP will need to do before a pre-pack sale can be concluded and the extent to which the Regulations have addressed concerns.
The impact of the Regulations – dealing with a pre-pack
Essentially, once the Regulations are in force, an administrator will be unable to make a ‘substantial disposal’ of company property to a connected party within eight weeks of the administration commencing without either creditor approval, or an independent written qualifying report being produced by an evaluator (the “Evaluator”).
The Evaluator’s report must state whether they are “satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances” or not. A substantial disposal is in short, one that involves “all or a substantial part of the company’s business or assets”.
The connected person is responsible for obtaining the independent qualifying report and needs to provide a copy of the report to the administrator.
However, it should be noted that even if the independent qualifying report states that a case for the substantial disposal has not been made this does not prevent the administrator from going ahead with the sale to a connected person. The administrator in this situation is simply required to provide a statement explaining why they are proceeding with the substantial disposal.
Identity of the Evaluator
Following the government publishing draft regulations for comment last year (see our previous blog) stakeholders and those in the insolvency profession expressed a number of concerns, most notably regarding the identity of the Evaluator.
Concerns were expressed that the qualification requirements for the Evaluator were not substantial enough, in the sense that the bar was not set high enough for who could be an Evaluator and as a result this would not provide creditors with confidence. The draft regulations simply provided that the Evaluator needed to believe they had the ‘requisite knowledge and experience’ to give an opinion and that the administrator must have no reason to believe the Evaluator did not have the requisite knowledge and experience. There was no requirement for the Evaluator to hold any professional qualifications.
Has this concern been addressed in the Regulations? To a limited degree, an Evaluator will be required to have professional indemnity insurance but the Regulations do not require the Evaluator to hold any professional qualifications – it remains the case that the Evaluator is the person to decide that they have the ‘requisite knowledge and experience’ to prepare the report.
Another concern raised was that connected persons may opinion shop in order to get a favourable qualifying report, reducing creditor confidence in the process. The Regulations try to address this by requiring an Evaluator to confirm in their report that they have been provided with a copy of any previous reports, or, if a previous report is not provided the Evaluator must address that in their report by giving reasons why the previous report has not been obtained and steps taken to obtain it.
The Regulations also provide that if a connected person states that no previous reports have been obtained the Evaluator must include a statement in their report to that effect.
However, it seems that several of the comments and issues identified in the October 2020 draft regulations have either not been addressed adequately or at all.
For example, several wanted a carve-out to be included in the definition of ‘connected persons’ in the Regulations for secured lenders. The argument put forward was that secured lenders are not part of the company or connected to it in the same way as other connected persons e.g. shadow directors and connected companies. Therefore, they are not responsible for the failure of the company. Similarly, there are other regulations and legal controls that limit any risks posed to creditors by a secured lender being involved in the substantial disposal. Despite the points raised by stakeholders this carve-out has not been included in the Regulations.
Responsibility for the report
Another concern that has not been adequately addressed is that it should be the administrator and not the connected person that must obtain the independent qualifying report.
The suggestion was that administrators are better placed to assist the Evaluator, as administrators have technical experience and may hold key information that is of use to the Evaluator. However, this recommendation was not included in the Regulation and the obligation to obtain the report remains with the connected person.
What is a substantial disposal?
There were also comments regarding the definition of ‘substantial disposal’. It was suggested that the term ‘substantial’ be further defined but this notion was rejected on the basis that what amounts to a ‘substantial disposal’ will vary depending on the nature and size of the relevant business and because insolvency practitioners are familiar with the term as it is commonly used in other insolvency legislation.
To conclude, there have been some helpful amendments and additions made to the draft bill published on 24 February 2021, when compared to the earlier draft published in October 2020. However, several concerns that may have helped improve creditor confidence in the process have not been included and so it remains to be seen how successful the Regulations will be at increasing creditor confidence in the pre-pack sale process once they come into effect (as expected) on 30 April 2021.