Pre-Pack Sales to Connected Parties – The New Evaluator Process

First of all, it is fair to say this blog is very technical and probably more for our professional contacts, so if you are a creditor jump to the bottom!

I also think it is fair to say that Pre-Pack sales by an Administrator have had a high level of press coverage. All the evidence suggests that a Pre-Pack sale commonly leads to a better return to creditors than a forced sale shut down. But equally, creditors are understandably concerned because the sale is conducted very quickly following the appointment of the Administrator and often, they are the last people to hear about it. This concern is always worse when the sale is to a connected party.

To deal with these concerns, the Government has introduced The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (“the Regulations”). These take effect from 30 April 2021.

The Rule changes mean that an Administrator will be unable to complete a sale of a substantial part of a Company’s Property to a connected party within the first eight weeks of the Administrator’s appointment, without either the approval of creditors or an independent written report (positive or negative) of an Evaluator.

Before we talk about the new Evaluator role, perhaps we should give some further details about Pre-packs and how they work.

A Pre-pack is the sale of the business assets either on or shortly after the appointment of the Administrator. There are a substantial amount of statutory and regulatory requirements involved, which would take a long time to run through in detail. However, a brief description of the main areas an Administrator has to cover are shown below:

·       That all other options have been explored and that details of those options and the likely outcome to creditors is provided to show that the Pre-pack is the best option.

·       Details of any requests made to funders to provide additional funds.

·       Why is/was it not possible to trade the business and offer it for sale whilst in Administration.

·       That some form of marketing is undertaken for the sale of business prior to the actual sale.

·       That an independent valuation of the business is undertaken by a party with relevant experience and PI cover.

·       Where possible, consultation with major creditors has taken place.

The new Rules only apply to sales to connected parties and, as mentioned above, require an Evaluator’s report or consent from creditors.

Consent from Creditors

Obviously getting consent from creditors would be the preferred option. However, in practice this will take several weeks to obtain. One of the main reasons for a Pre-pack sale is often because the Company has no funds to trade whilst in Administration or that the likely effect of the Administration is that the goodwill / customer confidence will disappear whilst we are waiting for approval.

My personal view is that we will see very few Pre-pack sales using the creditor consent route. It is also not clear what would happen if creditors do not agree to the sale.

Evaluator Route

The connected party purchaser is responsible for obtaining the Evaluator report. However, the Administrator will need to be satisfied that the Evaluator has the relevant knowledge, skill, experience and independence.

The Evaluator needs no formal qualifications but they are required to have professional indemnity insurance.

The Evaluator’s report must include details of the property that is to be sold, the consideration and whether or not the Evaluator is satisfied that the disposal is reasonable and how and why they have reached that conclusion.

If the Evaluator’s report is negative, the sale can continue but the Administrator will need to explain his reasons why.

My personal view is that, whilst I understand why this step has been taken, that is to improve creditors’ view of Pre-pack sales to connected parties, it will do little to do so. It will lead to increased costs, reduce the distributions to creditors and, therefore, be of little use to the profession. In the SME space it will lead to less Administrations and more Liquidations.

It is now becoming clear that the Insolvency Service preference is that Insolvency Practitioners use the Pre-Pack Pool to provide the Evaluator’s report. The current cost for this is £1,500 plus VAT. Of course, this is not compulsory so I expect that other parties will set up to provide this service. This is another area of concern; will we see as various parties set up as Evaluators, a reduction in confidence in the process. Only time will tell.

Overall, the main problem with Pre-packs is that there will always be creditors that are unhappy with the process, whatever regulations and safeguards are put in place, be it valuations, Evaluators’ reports or the like. Put simply, they have lost money and so when they see the former owners reappear in business it hurts. Some would prefer that the business was just closed!!  

What does this mean for Creditors?

Administrations will increase during this year as the restrictions ease and Government support reduces. Pre-pack sales will continue, although it may take time for people to get used to the new Rules. If you are creditor, remember the basics of credit control so that you do not suffer a bad debt in the first place. If you do end up as a creditor, consider if you have any retention of title claims and, if a new business appears, probably work on a pro-forma basis in the early stages.

If your business is going through a rough time and you think you could be facing insolvency, then talk to us. The first consultation is free and whether it results in comforting reassurance, a rescue plan, or an insolvency process, the sooner we start, the better your result will be. We hope it can provide you with a ‘roadmap’ to the future.