New regulations announced for “pre-packs” - Kuits Solicitors Manchester

New regulations announced for “pre-packs”

New regulations announced for “pre-packs”

19th October 2020 - Published by Kuits restructuring & insolvency team

Pre-pack administration

The “pre-pack administration”, where all or a substantial part of the business and assets of a company are sold immediately after the company enters administration, usually to a buyer connected with the company, are sometimes seen as controversial outside the restructuring industry.

After a consultation in 2014, the Government reserved the right to further regulate or even outright ban them in 2015. The restructuring industry introduced stricter compliance requirements and introduced the Pre-Pack Pool to voluntarily allow buyers to seek an independent opinion on the deal, but use of the Pool has been very limited. In 2017, it was used on 11% of pre-pack sales; this fell to 7% in 2018 and 9% in 2019.

With the possibility that more companies will become insolvent due to the COVID-19 pandemic, the Government has released draft regulations to require scrutiny of the process.

What do the regulations say?

An administrator will be unable to sell all/a substantial part of a company’s assets to a person connected with the company in the first 8 weeks of administration without either:

  • Approval of creditors; or
  • An independent written opinion obtained by the purchaser that states that the case is made for the disposal “is reasonable in the circumstances” prepared by an individual described in the regulations as an “evaluator”.

The requirements as to the evaluator’s qualification is stated in the regulations to be: An individual meets the requirements as to qualification if the individual believes that they have the requisite knowledge and experience to provide the report.

There does not appear to be a time limit before the sale when the independent written opinion must be dated; the administrator must have the opinion that there have been no material changes since the date of the report to the assets, the terms of the disposal or any circumstances relating to the disposal.

If the report concludes that the case is not made, an administrator can still proceed but must state the reasons for doing so in a report to creditors.

The regulations are likely to come into force before June 2021. In addition, the government has also said it will work with the restructuring industry and regulators to enhance regulatory requirements in the sector.

Creditors and Evaluators

The initial key is creditors. If a majority of creditors approve, there is no requirement for a report to be obtained. There are two issues: proposed purchasers are unlikely to approach creditors they do not know. But what if a majority of creditors are connected? Surely in this scenario the proposals do not solve the problem?

The next question is deciding who an appropriate evaluator is. Perhaps it will be the pool in the first instance, but beyond that the guidance is thin.

Pre-packs appear controversial for obvious reasons. However, the industry firmly believes that they are the best way of realising value for creditors and preserving businesses and, most importantly, jobs. In its accompanying report, the government anticipates that with the COVID-19 pandemic “pre-pack sales during this period will also continue to be a valuable tool in the restructuring and insolvency framework to help rescue viable businesses and save jobs.” You can read the full report HERE.

Get in touch with a restructuring and insolvency lawyer in Manchester

If you have any queries on pre-packs or have a restructuring or insolvency issues you would like to engage one of our expert advisors on, please contact the head of our restructuring and insolvency team Richard Palmer on 0161 503 2996 or email richardpalmer@kuits.com.

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