Pre-pack sales?
What are Pre-Pack Sales – They are referred to as pre-pack administrations. The sale normally takes place within a few weeks of the company being placed into administration. They are typically regarded as a sale on a going concern basis.
The conversations and all the due diligence which takes place takes place before the formal date of administration and hence it is called prepack sale.
These transactions have ultimately been designed by the insolvency profession for companies in significant financial difficulties as a method for protecting some of the company’s business and staff force to avoid a formal insolvency where a company would stop trading completely.
Issues with pre-packs
In the days of when we had administrative receiverships, a going concern sale was always a huge success for the Receiver as the amount paid by the purchasing party would be considerably more thana break even sale as this benefited the amount which would be paid to creditors. It also had the benefit of retaining some of the key staff force. If the sale was done soon after the advice being taken from the Receiver, then it would be even better for the benefit of creditors.
The concern however is that it often takes too long for the sale to be completed after the company is placed into Administration AND the in some cases the ambiguity to do with the way in which the negotiations, the marketing of the assets and the decision to accept the pre-pack offer, which, is normally from directors of the company in administration or people connected to it. So ,all that really happens is that the liabilities are left in the old company and the assets sold to the directors new company.
Since 2014 new changes were introduced for prepacks BUT still the insolvency profession continued to juggle the competing requirements of compliance, transparency, commerciality and working for the benefit of creditors. The latter often does not happen and they are still perceived to be lacking transparency.
New Legislation – The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (ARR2021)
This law will apply to all substantial asset sales that take place in an administration within eight weeks of the appointment of the administrator that are to someone connected with the company.
Although the pre-pack sales are not specifically stated in ARR2021 it is drafted widely to include all substantial asset sales within eight weeks of the date of administration. This will include all pre-pack sales and is likely to include the majority of going concern sales in administrations, whether the negotiations started before the date of administration. Consideration has to be given to paragraph 60 ( A) ( 3) Sch B1 of the insolvency Act 1986 which defines a “connected part “ – a company connected with the company, a director, other officer or shadow director of the company and a non-employee associate of such a person or of the company.
ARR2021 applies to all substantial asset sales to people connected with the company that take place within eight weeks of the date of administration, but it includes more than just the old pre-pack sales where a sale was negotiated before administration and completed shortly after administration. This is important and should be remembered by officeholding Insolvency Practitioners and those working for them as ARR2021 and future regulation of compliance with it will not be limited to pre-pack sales.
Consideration need to be given to It is also important to note that the Statement of Insolvency Practice 16 (SIP 16), which has been amended as a result of ARR2021, still only applies to pre-pack sales to connected parties.
So as of 30 April 2021, substantial assets sales to persons connected with the company may only take place within eight weeks of the date of administration if the sale has been approved by creditors, or if the proposed sale has been reviewed by an evaluator who has provided a qualifying report.
The effect of the Evaluator
This role is introduced by ARR2021, to provide the opportunity for the objective review of prepack sales.
He or she would be an independent individual who is satisfied that they have been provided with the relevant knowledge and experience to make a qualifying report and who has professional indemnity insurance in respect of potential liabilities to the administrator, the connected person, creditors and any other person as a result of or arising from the evaluator’s qualifying report.
Using an evaluator is likely to be the most efficient and commercially sensible way of having a proposed substantial asset sale approved . It is a way of restoring trust in the sale of assets in administrations to people associated with the company. It is for the proposed purchaser to instruct an evaluator to review the proposed sale. The report from the evaluator must include a statement that either the evaluator is satisfied that the consideration for the relevant property and the grounds for the substantial proposal are reasonable in the circumstances or that the evaluator is not so satisfied.
This report is then considered by the administrator and even if he or she is not happy with that report they can continue with the sale BUT must provide a copy of the evaluators report to creditors and an explanation around the reasons to proceed despite the evaluator’s decision. This seems to restrict the role of the evaluator to one very similar to that of the Pre-Pack Pool.
The ARR2021 reg 7 provides the way in which the required report is to be prepared and it is limited to information about the transaction and the evaluator’s professional indemnity insurance, qualifications and experience. The evaluator would accordingly review the proposed transaction and although the evaluator may ask the administrator for information, the role of the evaluator, as defined by the legislation, does not include reviewing the actions and decisions of the administrator, such as the marketing of the assets.
If the appointment of the evaluator is to restore trust amongst creditors BUT then the report prepared by them can be ignored by the administrator, then what is the point of the evaluator in the first place if their role is restricted to review only the asset sale?
Surely the Insolvency Practitioners who want to show that they are acting in the best interest of the creditors will want to encourage the purchasing party to instruct an evaluator AND take note of the evaluators report.
The saga continues.
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