Pre pack administration sales – laying down the law
We’ve previously written that the government was bringing in new changes to the law surrounding pre-pack administration earlier this month.
After debate in the House of Commons and the House of Lords this week, the changes to the legislation were duly passed by parliament and will formally come into force on April 30th 2021.
While we always approve of any efforts to improve and strengthen the insolvency and restructuring process, it will be interesting to see how the role of the evaluator in the pre-pack process will play out in actual cases.
Some pre-pack administrations involve the sales of a distressed business to “connected parties”. These are individuals with some previous connection to the business – and can include previous directors or management who want to buy the company and run it themselves.
In an effort to improve stakeholders’ confidence in this process, one of the legal changes was to have every sale involving a connected party overseen by an independent evaluator.
But there’s some concern within our industry about the status and qualifications of the evaluators.
Colin Haig, President of R3, the insolvency and restructuring trade group said: “We welcome efforts to improve stakeholder confidence in pre-packs, but it may be proved that this legislation has missed the mark.
“Sales to connected parties in pre-pack administrations will now be subject to creditor approval, or review by the new independent Evaluator position.
“The rationale for this is clear but the practicalities around ensuring that an Evaluator is a fit and proper person is where the regulations could fall down.
“These regulations effectively leave it to the market to regulate the Evaluator position. A far better alternative would have been for the Government to agree to maintain a list of approved Evaluators.
“This might have meant an additional administrative burden for them, but it would have given stakeholders greater confidence that these reforms were robust rather than just the easiest option for the Government.”
Some of the speakers in the parliamentary debate raised concerns about the prospect of “opinion-shopping” when it comes to evaluators – only appointing one that happens to agree with your valuation or choice of buyer.
One of the speakers in the debate, Lord Foulkes of Cumnock, said: “As others have done, I also want to ask about the Evaluators, who will be given significant responsibilities.
“It would be helpful to know what qualifications will be required to act as an Evaluator and will the Government consider a register of approved Evaluators maintained by the Insolvency Service?”
The Insolvency Minister Lord Callanan didn’t agree to any changes in the legislation but said that the Government may revisit banning connected party pre-pack sales or further reforms if the regulations prove not to be working as intended.
Chris Horner, Insolvency Director with Business Rescue Expert, reiterates our position.
He said: “Getting an Evaluator, who will act as a qualified valuer, to report on any sale and putting their professional opinion, with any supporting evidence, in writing provides transparency and clarity to any administration sale.
“We have always used professional third parties to provide their opinion on transactions we have initiated or overseen so it’s encouraging that our approach has been codified into law as legal best practice.
“Further cementing trust in our industry and our procedures will be paramount in future as government financial support for businesses is withdrawn and more will be seeking professional insolvency advice and help as they decide what direction they can take their business as a result.”
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As more businesses begin to reopen, free from previous restrictions, they might re-emerge into a new, unfamiliar world.
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