The future of pre-pack sales after insolvency reform

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, which came into force on 30 April 2021, introduced several changes to pre-pack sales to connected parties in order to restore public confidence in this type of restructuring deal.

In this article, insolvency expert and pre-pack sale evaluator Mark Parkhouse explains how the Regulations changed the insolvency landscape and considers how further clarification may help strengthen the system in the future.

What does the new legislation say and what was changed?

The Regulations introduced to pre-packs an evaluator to consider the sale and provide a statement for creditors as to whether the sale is satisfactory. Prior to the Regulations, a voluntary system of providing such opinions has been available for nearly six years since the publication of the Graham Report in 2014.

However, the uptake of opinions was low and therefore the government made the evaluator system compulsory. Since the introduction of the new Regulations, a connected party must obtain an opinion by an evaluator and supply it to the proposed administrator before the sale.

It could be argued that the new legislation requires an evaluator to look over the shoulder of the administrator and scrutinise their pre-packs. However, this is not the point of the Regulations: unsecured creditors are a constituency that the government insists deserve better explanations of the marketing process and how the best price has been obtained for assets sold to connected parties. As such, the legislation is not a product of mistrust of administrators, but a means to better explain to unsecured creditors the steps taken in the process of sale. Some may even suggest that the new legislation, with the improved SIP 16 report, represents big steps forward in relation to clarification of the process.

It will be valuable to the insolvency process if the evaluator’s report is not to be seen as a hinderance but as an opportunity to work more openly and to show that the administrator has – as will so often be the case – done the very best in the circumstances for all the creditors.

The Graham Report

Theresa Graham’s Report was published in 2014. This was both a rap on the knuckles and a wake-up call to the industry; if the profession does not want further regulation, it needs to be more open and collaborative about how it operates.

The Report made numerous recommendations other than that which led to the enforcement of the now mandatory evaluator system.

With several recommendations still being considered, a wider regulatory shakeup is potentially in the pipeline. However, there are some concerns that an increase in regulation might entail an increase in costs.

This will often fall on the portion of a sale price that could otherwise be distributed to unsecured creditors. However, again like the 2021 Regulations, change should be welcomed within the industry.

For instance, some areas within the Regulations could be amended to add clarity. Reg 3.3, for example, refers to a “substantial disposal” but the definition of this is not made clear. That has perhaps been left to be construed as a matter of common understanding, rather than a specific term, and it may in due course need a court to rule definitively.

Further, it is unclear in the current circumstances whether the administrator can use deemed creditor consent for the pre-pack sale to connected parties. Some say yes, under Pt 15 of the IR 2016; but the wording in Reg 4.2 (and Pt 15) seems to require definite action in which the office holder goes to the creditors and gets a decision, rather than relying on the deeming provision.

The future of pre-packs

Pre-packs are often admired within the profession as an essential tool to preserve businesses and jobs. That being said, they do however often fail – frequently within less than three years, particularly where sales were made to connected parties. One further change could be the adoption of the viability report, which will require consideration of whether the new company taking over the assets can prove viable in the longer term.

The insolvency profession presently has a golden opportunity to show its worth and the value it brings with business recovery processes – where harder liquidation-type alternatives may lead to final collapse and redundancies.