To some, pre-pack disposals of a company’s assets and business (Pre-packs) is a useful procedure in the fight to avoid insolvent liquidations, rescue distressed companies, save jobs and protect creditors’ interests. To others, Pre-packs are, and have long been, a target for attack and criticism for lack of transparency and accountability. The latest attempt to reset the balance is the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (Regulations).
Under the Regulations, as from 1 May 2021, administrators are prohibited from disposing of all or a substantial part of a company’s business and assets to any connected person within 8 weeks of the commencement of the administration unless:
- creditor approval of the disposal is given; or
- the connected person obtains, and gives to the administrator, a report from an independent evaluator (setting out details of the connected person, the consideration, and the grounds for determining whether or not the transaction is reasonable).
Interestingly, whilst the evaluator must be independent of the connected person, have the appropriate understanding, knowledge and experience to make such a report, and have suitable professional indemnity cover in favour of the interested parties, he need not be professionally qualified.
The report must be considered carefully by the administrator, but where an adverse report is given, the administrator may nevertheless undertake the transaction so long as the administrator makes a declaration to creditors setting out the grounds for, and the argument in support of, the transaction.
Time will tell whether the Regulations will satisfy the calls for greater transparency, without (at the same time) deterring the use of Pre-packs by administrators in cases which merit the transaction.
Nick is a highly experienced transactional corporate and commercial lawyer, and Director, at Thompson Smith and Puxon. He can be contacted by email at firstname.lastname@example.org or by phone on 01206 574431.