Mandatory Independent Scrutiny of Pre-Pack Sales to Connected Parties to be Introduced in the UK
On 8 October 2020, the UK government published a report reviewing voluntary measures introduced in 2015 to improve the transparency of pre-pack sales in administration.
There is no legal definition of a pre-pack, although the term is used to explain the sale of a insolvent business by an administrator back to existing management (usually on or shortly after their appointment). This is often the best outcome for creditors, providing a better return; but because the sale is to a connected party, creditors lack confidence in the process.
The voluntary measures introduced by the Government in 2015 sought to improve creditor confidence enabling connected person purchasers to voluntarily obtain an independent opinion from the “Pre-Pack Pool” that the proposed sale was the best option.
The Government’s report notes that despite these measures pre-packs are still a concern and there is still perception that they are not in the best interests of creditors. Accordingly alongside the report the government has published draft regulations that will (unless amended) introduce a mandatory requirement for an administrator to obtain creditor approval or an independent written opinion before proceeding with a pre-pack sale to a connected party.
It will be for the connected pre-pack purchaser to obtain the opinion from any individual who “believes that they have the requisite knowledge and experience to provide the report”.
The draft regulations will increase the scrutiny of the pre-pack sale process for all parties, including creditors. They will apply where there is a disposal of all or a substantial part of a company’s assets in administration. Administrators will be unable to dispose of the property of a company to a connected person within the first eight weeks of administration, without either the approval of creditors or an independent written opinion from an ‘Evaluator’.
The process for identifying who can be appointed as ‘Evaluator’ lacks clarity which could raise concerns in regards to the merit, value and true independence of the opinion provider chosen.
However, we hope that when the Regulations are enacted and further guidance is provided that the new measures will be welcomed by the insolvency profession and creditors because it will provide further transparency to a process that is often in the best interests of creditors but which, because of the involvement of previous management, is often criticised.
This article was written by Bethany Darragh.