New law: Requirement for creditors’ approval of pre-pack and other disposals by administrators of insolvent companies starts to bite

Buyers of all or a substantial part of a company’s business or assets from its administrators within the first eight weeks of the administration, and who are ‘connected persons’, cannot, under recent changes to the law, proceed until the administrator has obtained either:

• creditor approval to the sale (or hire out or other disposal) of the company’s business; or
• a report from an independent person with relevant knowledge, experience and insurance - an ‘evaluator’ - on whether the purpose of the proposed transaction and the price payable are reasonable in the circumstances.

A copy of any evaluator’s report must be filed at Companies House (although it may be redacted) and given to creditors. An administrator may still proceed despite a negative evaluator’s report, but must give reasons why they are doing so.

One target of the new laws is ‘pre-pack’ administrations. The objective of an administration is to try to rescue the company and prevent it going into liquidation, so usually an administrator will try to ensure the company continues trading. However, in a pre-pack administration a company in trouble negotiates a sale - sometimes secretly - of the attractive parts of its business to a buyer – sometimes the existing management - before an administrator is appointed. The administrator completes the sale shortly after their appointment.

Pre-pack administrations can be beneficial. For example, the sale is often negotiated before customers, suppliers, employees etc become aware the company is in trouble, and therefore before any of the consequent disruption to trade, loss of employees, etc occurs. The pre-pack can therefore result in welcome continuity of trade, saved jobs and a higher price being paid than on sale of a ‘business in trouble’.

But a pre-pack can also be disadvantageous. For example, creditors may argue that marketing the business more openly could have flushed out rival buyers prepared to pay more. Unsecured creditors, who only find out about a pre-pack sale after the administrator has been appointed, may object because they feel excluded from this ‘done deal’, and there can be specific prejudice to landlords. There has also been concern that pre-packs have been used to jettison pension scheme liabilities.

The new rules require creditor approval of not only pre-pack disposals, but of a wider range of transactions (including a disposal effected through a series of transactions), provided they take place within the eight-week timeframe. They also apply to all companies, irrespective of size.

Operative date

• Now

Recommendations

• Buyers of businesses from an administrator should check whether the administrator will need to get creditor approval to the transaction, or an evaluator’s report, and the implications on timing, and factor those into their negotiations and the price offered.