It has almost been 12 months since the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 came into force on 30 April 2021. The regulations require an administrator to obtain creditor approval or a report from an independent evaluator in advance of completing a “substantial disposal” of the company’s property to a connected party within the first eight weeks of the administration.
We produced the attached FAQ document in April 2021 to explain the key aspects of the regulations and answer key questions about the process.
Having completed a number of connected-party transactions since the regulations came into force, acting for either administrators or buyers, in our experience complying with the regulations has not presented a significant challenge in completing those transactions, although in practice we have found the following:
Evaluator Report or Creditor Approval?
As anticipated in the FAQ, the parties have elected to obtain an evaluator report rather than seek the prior approval of creditors in every connected-party sale that we have dealt with in the first 8 weeks of an administration. Given the timescales involved in seeking approval from creditors, seeking that approval is not a realistic alternative when trying to preserve the goodwill value of a highly distressed business.
Timing and Costs
One of the most ‘challenging’ aspects of the new regulations is deciding when to engage an evaluator. An evaluator has to be engaged sufficiently in advance of the intended completion date for the sale, in order to obtain the report ahead of completion, but not too early, otherwise this risks having to commission another report if the terms of the deal change. In our experience from a timing perspective, engaging an evaluator as soon as the material commercial terms of the sale are agreed, has not proved an issue or delayed completion.
If the process is managed properly, the main impact of the regulations has been the increase in transaction costs for the buyer, given that the buyer bears the costs of the evaluator. However these costs are not particularly significant, and providing that the evaluator’s opinion is positive, the report may assist the directors and the buyer in giving some comfort to creditors that the transaction stood up to independent external scrutiny.
Use of an Intermediary
Given that the most common type of “connection” in a connected-party pre-pack arises where the directors of the insolvent company are also directors and/or investors of the buying entity, there are significant demands on the directors’ time from both sides of the transaction i.e. complying with their directors’ duties in the run up to an administration, managing the appointment of the administrators and then managing the purchasing and funding structure of the buying entity, whilst also trying to engage with the company’s key creditors and stakeholders.
We have found that in situations where the buying entity engages an intermediary with experience in the evaluator process to assist the buyer in providing the relevant information to the evaluator, and to ensure that the information presented to the evaluator is presented in a form that enables the evaluator to compile their report as efficiently as possible, this has allowed the directors of the insolvent company more bandwidth to deal with the other demands on their time.
If information is provided to an evaluator in a haphazard or incomplete manner, then that is likely to (i) delay the production of the evaluator report (which could then delay the completion of the sale), and/or (ii) increase the likelihood of receiving a negative opinion from the evaluator. Whilst a negative opinion will not necessarily prevent a sale, it is likely to cause greater concern for an administrator and they may need to obtain additional internal risk clearance before completion, which could impact timescales.
Cautious Approach to Connected Party Status
Where there is doubt about whether a buyer is a connected party or not, or whether a sale constitutes a “substantial disposal” under the regulations, administrators are generally adopting an “if in doubt, ask for an evaluator report” stance. This is a sensible approach, to avoid the administrators being at risk of failing to comply with the regulations.
In summary, the regulations are not causing significant issues or delays with connected-party administration sales, providing that parties engage with the evaluator process as early as possible in the deal timetable and obtain appropriate support from their advisers.