10th March 2021

As we enter a period of further uncertainty, with many companies having geared up with government backed funding, there is every expectation that there will be an increase in managements seeking to use the Administration process to rid the business of debt, re-acquire the business and start again. We can debate the ethics another time, however the reality is that some businesses will not be viable with the Covid legacy debt, and in many cases only the current management will be willing to bid for the business.

The Government
The UK government has long wrestled with the need to not outlaw connected party pre-packs, as the truth is that this would destroy potentially viable businesses and result in increased unemployment. There has however undoubtedly been abuse of the process in the past, with businesses being sold back to management by insolvency practitioners without adequate marketing of the business to ensure that, if there is a better third party bid, it is both found and taken. Where this is suspected, you can fully understand the wrath of the creditors left behind. The government approach has been essentially two-fold:

Without being prescriptive, SIP16, the IP’s mandatory guidelines, sets out generic directions that the business should be properly marketed.

The government feels that if the process is better explained to creditors then this transparency will help them understand and accept the transaction.

In order to enhance this in 2014, the Pre-Pack Pool (“PPP”) was introduced. This was a pool
of independent individuals appointed to review proposed pre-packs and to issue a report
giving one of three opinions;

  • Not unreasonable to proceed;
  • Not unreasonable to proceed but with minor limitations in evidence; or
  • Case not made.

The PPP report was prepared for the proposed purchaser however it was not mandatory i.e. the purchaser could simply decline to use the process. At KRE we estimate that less than 10% of management on the cases that we dealt with opted to use the PPP. In 2014 we wrote on our website that in our opinion “the process cannot be voluntary, the applicant should be the administrator and the PPP needs to be transparent and answerable for its opinions”.

We are therefore not surprised that new legislation is being brought in as the previous requirements were seriously flawed.

The New Regulations

The new regulations will apply to Administration appointments on or after 30 April 2021 and under the draft regulations, an Administration will not be able to complete a sale of all or a substantial part of a company’s assets within 8 weeks of his appointment without obtaining either;

  1. the approval of creditors; or
  2. an independent written report

Creditor approval could be fraught with difficulty as in some cases returns to creditors will be minimal with no incentive for approval. Confidentiality is also likely to be a significant issue. We envisage therefore that in most cases, the independent “Evaluator’s” report will be the route adopted.

The mandatory element is welcomed however the regulators then appear to go off-piste by stating
the report “should be from someone who is satisfied that they have sufficient relevant knowledge
and experience to provide that report”. There is no regulation around the Evaluator’s qualifications
but he must be independent, have not provided relevant advice to the company in the past 12
months, must not be a colleague of the Administrators, and must take out or have professional
indemnity insurance.

It is difficult to see how this will increase creditor confidence in the process if the Evaluator has no professional qualifications or evident relevant experience. Whilst we understand the government’s dilemma the truths of the matter are;

  • Creditors involved in a pre-pack situation have lost money and the existing management are starting again in business. Increased transparency and independent scrutiny are unlikely to increase creditors’ confidence in the process;
  • The government has declined to ban connected party pre-packs on several occasions now, seeing them as “a valuable part of the insolvency framework”. Following the pandemic, the government needs the pre-pack process to preserve businesses and employment.

What would we suggest?

All IP’s are regulated by their licensing bodies, whether it is the ICAEW, the IPA or The Law Society. It seems to us that if this is such an important matter then one solution would be for all IP’s to have to seek clearance from their regulatory body for such a transaction. A clearance fee could be charged to fund the resource and if clearance is denied then it is a foolish IP that goes against the opinion of his regulator.

If you would like to discuss any of the above or have any queries, please do contact one of our Directors:
Rob Keyes – 07500933022
Gareth Roberts – 07979706392
Paul Ellison – 07967471211
David Taylor – 07855231103