What is pre-pack administration?
Pre-pack administrations involve arrangements to sell whole or part of a company’s business or assets prior to the company entering into administration. Frequently directors and/or shareholders (or individuals associated with them) take steps to purchase the company’s business and assets on or after the appointment of administrators.
The intended purpose of pre-pack administration is to (i) preserve jobs; (ii) preserve the value of the company’s assets; (iii) generate prompt payment to creditors; and (iv) achieve maximum return for creditors. However, there is a general consensus that pre-pack administrations are not always in the best interests of creditors.
The proposed regulations
The UK Government has presented draft regulations in Parliament that will require mandatory independent scrutiny of pre-pack administration sales where connected parties (i.e. directors and shareholders) are involved in the purchase of a company’s assets. It is expected that the draft legislation (The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021) will require an administrator of a company to instruct an independent evaluator to provide a “qualifying report” confirming that:
“The evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances or, as the case may be; OR
The evaluator is not satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances”.
The stricter independent scrutiny on pre-pack sales is designed to increase confidence in the insolvency regime and has been set out in an attempt to protect jobs and support the UK economy. It is hoped that the draft regulations will ensure all sales to connected parties are properly scrutinised – protecting the interests of creditors and the general public, as well as the distressed company.
Industry leaders are broadly in support of the proposed new law, with Colin Haig, President of insolvency and restructuring trade body R3, saying:
“Pre-pack administration sales involving connected parties are an important rescue tool as they are often the best way of preserving a business and ensuring maximum returns to creditors.
“The insolvency and restructuring profession is very sensitive to the impact of pre-packs on creditors, and there is a careful balance to strike in these situations between transparency, protecting creditor value, and business rescue, which these proposals support”.