Regulations proposed to ‘tighten up on regulation of the pre-pack process’

Regulations proposed to ‘tighten up on regulation of the pre-pack process’

The Insolvency Service has published the outcome of its review conducted into the impact of the voluntary industry measures introduced in November 2015, which aimed to improve the transparency of connected party pre-pack sales in administration. Following the assessment, the Insolvency Service has published draft regulations which are intended to be laid before Parliament. David Kerr, of David Kerr Consulting Ltd, comments on the proposed regulations, which he says intend to ‘tighten up on regulation of the pre-pack process—in particular, where the sale of a business is to a connected person’.

The Minister for Climate Change and Corporate Responsibility, Lord Callanan, has stated that the review highlighted concerns surrounding the transparency of pre-pack sales and ‘whether they are always in the best interest of creditors’. Therefore, the proposed legislation aims to address these concerns and ‘improve confidence in the process.’ Callanan insists that measures will also be undertaken to enhance professional regulatory standards and the information provided to creditors.

The review maintains the conclusions reached by the previous ‘Graham Review’ that pre-pack sale offers the best result for creditors after an insolvency in many circumstances. Therefore, the ability to ban connected party sales in administration will not be utilised but new regulations are proposed to build on the existing measures.

Key elements of the proposed regulations include:

• the regulations would apply ‘where there is a disposal in administration of all or a substantial part of a company’s assets’

• administrators will no longer be able to dispose of company property linked to a person in the company ‘within the first eight weeks of the administration without either the approval of creditors or an independent written opinion’—removing the voluntary use of the Pre-Pack Pool

• a requirement that the provider of the opinion is to be independent of the connected party purchaser, the company and the administrator and meets eligibility requirements

• a requirement that the administrator has ‘no reason to believe’ the opinion provider is not independent and does not meet eligibility requirements

• a written report will be given by the opinion provider explaining whether the case is made for the disposal or will not be made

• more than one report can be obtained by the connected party purchaser

• a report must be considered by an administrator from an opinion provider

• if a report says a case is not made for disposal and an administrator proceeds with the disposal, there is a requirement to provide a statement of reasons for proceeding

• a copy of the report(s) should be sent to creditors of the company and Companies House by an administrator

Kerr comments ‘Interestingly, while there are some restrictions on who can provide an opinion, the Government’s draft regulations on the qualifications of the opinion provider simply state that the provider must self-declare that they believe themselves to have the requisite knowledge and experience to do the job! Also, rather oddly, the Service’s report on its review of pre-packs expressly states that the purchaser can obtain more than one opinion. One possible (but presumably unintended) consequence of this might be to give purchasers a licence to shop around for a positive opinion.

Will this enhance creditor confidence in pre-pack sales to connected parties? The purchaser will commission an opinion and can pick the opinion provider. Although the provider must not be someone who has advised the parties in the previous twelve months, how independent will they really be? Whereas the Pool operates on an automated rota basis free of manipulation or undue influence, the purchaser does not choose the reviewer and cannot easily ignore or discard the opinion provided. Will these measures advance trust in the profession and in this process?’

The outcome of the Insolvency Service’s assessment can be viewed here.

The proposed regulations can be viewed here.

Written by Pietra Asprou

Source: Pre-pack sales in administration

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About the author:
Pietra has completed the Bar Professional Training Course at the University of Law and was called to the Bar in 2019. Prior to the BPTC, Pietra undertook a law degree at the University of Bristol.