With some inevitability, the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2020 (the “Regulations”) attained Parliamentary approval on 22 March 2021. They will come into force on 30 April 2021.
The Regulations regulate pre-packaged sales (pre-packs) to connected parties – a topic which has been in the government’s crosshairs for some time – and has generated much debate. Some of that feedback is reflected in the final version of the Regulations.
Below is a non-exhaustive summary of the Regulations followed by some practical points for practitioners to consider.
1. Which pre-packs are caught by the Regulations?
Pre-packs which meet all of the below criteria:
- A disposal, hiring out or sale of all or a substantial part of the company’s business or assets (via one or more transactions);
- completed within 8 weeks of the commencement of administration;
- to a “connected person”.
2. Who is a “connected person”?
Exactly who you think, most likely.
It takes some unpacking, but in short:
- Where the buyer is an individual, the buyer is connected if they are a “relevant person” – which encompasses directors (including shadow directors), other officers, any of their non-employee associates, and any non-employee associate of the company (e.g. shareholders with one-third or more of the voting power at general meetings); and
- Where the buyer is a company, the buyer is connected if any of the above relevant persons is or has ever been a relevant person of the buyer as well as the company.
See section 435 IA 1986 for the full list of “associates”, which no doubt you will be familiar with.
The key point is, “connected” has broad reach.
3. Do the Regulations ban pre-packs to connected parties?
No - at least, not for now.
4. What do they ban, then?
An administrator must not complete a pre-pack to a connected person which has not been either approved in advance by creditors or been the subject of a prior report by an ‘evaluator’.
5. What amounts to creditor approval?
Approval of the administrator’s proposals (which must include a proposal to complete the pre-pack), either without modification or with modification to which the administrator consents.
Whether it is practical to obtain creditor approval will depend on the circumstances. Where only the secured creditor(s) need approve the proposals then obtaining creditor approval could be swift and straightforward. Where approval is needed from the general body of creditors via a decision procedure then that might take too long (albeit nothing in the Regulations prohibits use of the deemed consent procedure).
6. What is the report and who is the evaluator?
This is perhaps the aspect of the Regulations which has generated the most debate.
The Regulations prescribe the minimum contents of the report. In essence it must contain a reasoned conclusion as to whether the consideration payable and grounds for the pre-pack are “reasonable in the circumstances”. A positive report is a so-called “case made” opinion. A negative one is a “case not made” opinion.
As has been well-documented, the Regulations are open to criticism – and the system is open to abuse - because, for example:
- The evaluator’s opinion – whether ‘case made’ or ‘case not made’ – does not bind the administrator. The administrator can go ahead and conclude the pre-pack regardless as long as they have (i) considered the report, (ii) have no reason to believe the evaluator did not meet the (slim) qualifying requirements, (iii) the deal has not changed materially from that reported upon, and (iv) the administrator sends the report to creditors with written reasons for proceeding despite the negative report.
- The evaluator needs no professional qualifications. The evaluator need only self-certify that that they have “the requisite knowledge and experience to provide the report” and that they are not disqualified by the Regulations from producing it (e.g. by reason of lack of independence or other factors such as prior criminal offences or being subject to insolvency proceedings).
- The evaluator is appointed and remunerated by the buyer (why bite the hand that feeds you?).
More positively, following the amendments to the first draft of the Regulations:
- An evaluator must have professional indemnity insurance in place and provide details in their report – which, indirectly at least, may prevent under-qualified individuals from acting as evaluators to the extent they cannot obtain insurance.
- The report must contain details of any previous evaluator’s reports obtained by the buyer, i.e. to tackle ‘evaluator shopping’ - albeit the evaluator is entitled to rely upon the buyer’s statement that no such report(s) have been obtained unless the evaluator has reason to believe that statement is incorrect.
7. What happens if an administrator concludes a pre-pack without obtaining creditor approval or a report?
Surely such a thing would never happen...but if it did? Then the Regulations do not prescribe any particular consequences. For example, the pre-pack is not deemed void. Aside disciplinary action for the administrator, the only obvious remedy for creditors would be a misfeasance action under paragraph 75 of Schedule B1 but would creditors have suffered a quantifiable loss caused by the pre-pack going ahead?
8. Practical points arising
It remains to be seen whether the Regulations will protect creditors or improve the public perception of pre-packs. Do they really target the root cause of ‘bad’ pre-packs and might those same individuals simply circumvent the Regulations? Is a sale carried out 8 weeks post-appointment really a pre-pack?
In any case, the Regulations are here to stay until repealed or amended and so we conclude with a few practical points arising from them:
- It goes without saying but it may take some due diligence to confirm whether or not the buyer is ‘connected’ for the purpose of the Regulations, such that the Regulations will apply. Proposed administrators should insist upon full disclosure of all relationships between the debtor and its officers on the one hand and the proposed buyer on the other hand.
- If the Regulations will apply, identify early whether the pre-pack will be justified via the proposals/creditor approval route or by an evaluator’s report. There are obviously timing implications and risks attached to either route.
- If an evaluator’s report is to be obtained, the administrator ought to satisfy themselves in advance that the buyer’s choice of evaluator has the ‘requisite knowledge and experience’ to provide the report: there is no central register of approved evaluators. If not, and the report contains a ‘case not made’ opinion, the administrator cannot proceed with the pre-pack…
- …but administrators must be careful not to dictate who the evaluator should be.
- As ever, administrators should document all of their decisions as fully, accurately and contemporaneously as possible. It seems inevitable that regulatory bodies will focus on compliance with the Regulations during future inspections.