Administration: key questions remain about pre-pack sales

10 November 2020: Proposed legislation which places certain conditions on connected person sales in administration is very much under the spotlight. Will the proposed regulations solve the ‘perception’ problem?

A framework in which companies can be rescued or dissolved but endeavours to preserve jobs and look out for creditors is intrinsic to doing business. 

COVID and the pressures it has put on the viability of some businesses has prompted changes to insolvency legislation, and it is hoped that the measures introduced in the Corporate Insolvency and Governance Act 2020 will help businesses bounce back and recover.

However, one element of the insolvency process – namely pre-pack sales – is still suffering from a ‘perception’ problem. The perception problem arises when a business is sold to a person connected with the insolvent company and the creditors are unaware of the sale until the transaction has completed.

The government has resolved to address these concerns in legislation which places certain conditions on connected-person sales in administration. This action follows the lacklustre performance of voluntary measures – termed the use of the pre-pack pool, or a group of independent, experienced business people, formed to provide such an opinion – which have had some impact on behaviours but not in line with expectations.

The draft regulations purport to ensure that proposed pre-pack sales are subject to a measure of independent scrutiny. Under the regulations, an administrator will be unable to dispose of property of a company to a person connected with the company within the first eight weeks of the administration without either the approval of creditors or an independent written opinion from an ‘evaluator’. The connected party purchaser will be required to obtain the written opinion.

The evaluator is qualified to write the report if they believe they have the requisite knowledge and experience to do so. 

ICAEW believes that some key questions arising from the draft legislation remain to be addressed and, if they cannot be, then alternatives should be considered. 

It previously suggested a non-legislative alternative for a review between the administrator and an independent third party of disclosures made by the administrator. It believes this would have increased transparency and been easier to formulate than the proposed legislation in part because it would have remained in the regulated environment. 

Another alternative, suggests ICAEW, would be to make mandatory the use of the pre-pack pool, or an equivalent.

You can find the ICAEW representation here.