On 8 October, the Government announced that it will bring forward new regulations requiring mandatory independent scrutiny of pre-pack administration sales where connected parties, including the former company’s existing directors or shareholders, are involved in the purchase.

The question for creditors is whether such regulations, which are expected to be in force before the end of June 2021, will improve confidence and transparency as hoped for by the Government. In particular will the new law address the criticisms of the pre-pack sale often expressed by the landlord community.

What is a pre-pack?

There is no statutory definition. It is short-hand for an arrangement whereby the sale of all or part of a company’s business and/or assets is negotiated and agreed before an insolvency practitioner (IP) is appointed, with the relevant documentation being signed and implemented, immediately or shortly, after the appointment is made.

It is inevitable that the coming months will see an increase in corporate insolvencies and therefore an increase in pre-pack sales. It is possibly with this in mind that the Government has decided to act now. The majority of changes to the insolvency legislation over the last 6 months has been to protect and assist distressed businesses. In bringing forward these regulations, the Government clearly wants to provide reassurance to the creditor community that protections still exist notwithstanding the more debtor-friendly changes that we have seen introduced over the past few months.

The good…

The advantages to a pre-pack sale are: the ability to maintain business continuity, to protect value in the business and to save jobs, all at a lower cost and therefore with greater returns to the company's creditors.

The bad…

However, these benefits are often seen as coming at a cost, in particular: a lack of transparency regarding the process, and a lack of value being achieved as a result of insufficient marketing of the business. In addition, many are concerned that IPs' are hopelessly conflicted when they are approached to affect a pre-pack sale to a connected party. In an attempt address these criticisms, the pre-pack pool was established in November 2015 giving parties the option of obtaining an independent report and opinion on the purchase of the business. IPs were also required to provide greater information to creditors. However, the number of referrals to the pre-pack pool has falling in recent years and so the Government has decided to impose tougher regulation.

The solution?

The Government accepts that the pre-pack is a really useful tool that can help save troubled, but viable, businesses. To address the concerns over pre-packs the new laws are designed to ensure deals are properly examined to help balance the interests of everyone involved.

To achieve this, regulations will require compulsory scrutiny of pre-pack sales to connected parties. The Government invited comment on the draft regulations until 5 November 2020. Subject to any changes made following this consultation, the regulations will prohibit a sale of a company's business by an administrator to a connected party within the first 8 weeks of an administration unless:

  • Creditors approve the sale; or
  • A written opinion on the sale is obtained by the connected party from an independent evaluator, which must include a statement on whether or not the evaluator is satisfied that the consideration being paid is reasonable in the circumstances.

The sale is not prevented by an adverse report from the evaluator. The sale can still proceed, but the administrator must provide creditors with a statement setting out the reasons why the sale is still going ahead despite the adverse report.

Independent and expert?

The independent evaluator, as the name suggests must be independent and the regulations set out in detail what that means. However, it is the qualifications of the evaluator that has generated the most comment. The draft regulations provide that the evaluator "meets the requirements as to qualifications if the individual believes that they have the requisite knowledge and experience to provide the report."

Some have expressed concerns that connected parties will simply "shop around" to get a favourable report. However, there is a further protection in that an administrator can only proceed with the sale if they have no reason to believe that the evaluator does not have the requisite knowledge and experience to provide the report.

Will it make a difference?

The uptake of references to the voluntary pre-pack pool made it inevitable that some form of mandatory rules would be implemented. It will provide creditors with some degree of comfort that connected parties need to obtain this independent review of the pre-pack deal. However, as one commentator has said:-

"…one might still query creditors' perceptions of a connected-party purchaser of an insolvent company's business potentially obtaining an inexpert opinion on the transaction from an individual who, while independent, is not qualified according to any objective criteria. There also appears to be a legislative intention that a "second opinion" can be obtained by a connected-party purchaser if an initial evaluation is unfavourable."

(Mark Wellard, UK "pre-pack" sale in administration: The hand-wringing continues (11 October 2020))

For that reason, creditors will want to carefully consider the report of any independent evaluator on a pre-pack sale to satisfy themselves that the report has been prepared by someone with the requisite independence and expertise. Only time will tell whether the introduction of such independent evaluators will give creditors the confidence that many seem to lack at the moment when it comes to pre-pack sales.


Andrew Scott

Senior Associate