The present regime has led to much criticism regarding sales to connected parties/ management. Detractors believe the pre-pack administration sale lacks transparency leaving creditors dissatisfied and with feelings of being ‘stitched up!
The creation of a ‘pre-pack pool’ in 2015, whereby the purchaser of the business and/or assets and particularly those falling into the ‘connected’ category voluntarily had the proposed sale reviewed by an ‘independent body of experienced business people’ was hoped to provide reassurance.
It suffered from being voluntary and their decisions not being binding.
Supporters of the pre-pack sales have argued that in some instances the only realistic purchaser of the business will be the connected party. For example, where the potential TUPE liabilities would put off ‘independent’ purchasers. If the ‘connected’ party did not acquire the business, the company would be wound up with the loss of jobs and the burden of payment of the employee claims likely to fall on the state.
The criticism of lack of transparency persists.
In a move to resolve this issue the Government has produced draft regulations to ‘improve’ the transparency:
- An administrator will not be able to complete a sale of all or a substantial part of a company’s assets to a connected party within 8 weeks of entering administration without the approval of creditors or an independent report. The obligation is on the connected purchaser to obtain the report.
- Criteria for the provider of the independent report – from someone who, ‘believes that they have the requisite knowledge and experience to provide the report’. This excludes the Administrator’s associates. The Administrator can proceed the sale even if the independent report does not support it, but the Administrator will be required to justify his or her decision in writing. Interestingly the connected purchaser can obtain more than one report.
- A copy of the Report will be issued to creditors and filed at Companies House.
Other Legislative Matters:
Strengthening SIP16 whereby there is greater adherence to principles of marketing.
We at PCR believe the dissatisfaction with the current regime in relation to transparency needed to be addressed and introducing a compulsory review of the transaction is not a bad thing. However, as a rescue tool, the pre-pack administration’s strength was its speed and relative flexibility, especially where time is of the essence. If the regulatory changes cause undue delay and result in a sale failing the unintended consequence of the regulations may be to stifle genuine rescues. An eight-week period of hiatus could be difficult for the business to survive and the question remains as to who funds the working capital requirements in that time?
The proposals are expected to become law in April 2021.