New regulations and written reports will add a layer of administration and could endanger a speedy sale, say Tim Carter and Helen Martin.
Pre-pack administration sales are an effective but often controversial method of rescuing businesses and preserving jobs. As such, in October, the government proposed new regulations to address the market's concerns, which will require an independent expert review of sales to connected parties – for example, current directors or shareholders – and create an additional element of cost and transaction risk for purchasers.
A ‘pre-pack' sale involves a sale of the business of a company, which is negotiated and agreed before it enters into administration, and completed by the administrator immediately after appointment.
In 2015, new measures sought to address some of the criticisms relating to pre-packs and focused on sales to connected parties – principal concerns being lack of transparency and perceived unfairness to unsecured creditors. Among other marketing and valuation requirements, these reforms introduced a voluntary regime of referral to the "pre-pack pool" – an independent body of experienced business people – by the purchaser to obtain an opinion as to whether the proposed sale was reasonable.
The pre-pack pool was intended to give unsecured creditors some comfort that a connected sale had at least been subject to some independent scrutiny. In practice, however, only a small proportion of eligible deals (under 10% in recent years) have been referred to the pool.
The updated regulations, expected to be introduced by June 2021, will make it compulsory for an independent expert opinion to be sought for any pre-pack or business sale to a connected party concluded within eight weeks of an administrator being appointed. An alternative is to obtain creditor approval to the transaction – unlikely in a true pre-pack due to timing and commercial sensitivity.
The regulations do not apply where a business is being sold to an independent purchaser. However, where a connected party is purchasing the business, they will now face an extra hurdle. The purchaser will be required to seek an independent written opinion from an "evaluator" with the requisite knowledge and experience; those that qualify currently remain unclear.
Although a negative report from the evaluator will not prevent an administrator going ahead with the sale, they would be required to set out the reasons for doing so in their statement to creditors. Continuing with a sale in such circumstances could clearly be damaging for the purchaser and the business, especially in a high-profile sale, both in view of public perception and ongoing creditor relations.
What to do
- Always seek professional advice at an early stage if there are concerns about the company's ongoing solvency.
- Directors must keep in mind their duty to the creditors of the insolvent company. Written advice from an insolvency practitioner on all the options available to the company should be considered at a board meeting and all decisions recorded.
- If a pre-pack sale is determined the best option, an independent evaluator should be appointed at an early stage. Ensure they understand and can work within the proposed timescale.
- Avoid shopping around for ‘favourable' reports. Although this is apparently permitted under the regulations, it risks reputational damage. If there are concerns about a deal and the evaluator gives a negative opinion, it may be wise to take stock before going ahead.
- Finally, don't rule out a pre-pack sale on the basis of the new requirements – despite some extra cost, it may still offer the best opportunity to save the business.
If there are concerns about a deal and the evaluator gives a negative opinion, it may be wise to take stock before going ahead
Pre-pack sales are often concluded within a very tight timescale to preserve the business and avoid it falling into liquidation. Unnecessary delay, in obtaining an expert report, for instance, could undermine the deal altogether. On a connected sale, directors should ensure professional advice is obtained early on, including around their duties to creditors. If so, the new requirements, once they are introduced, should not prevent this route to business rescue.
Tim Carter is a partner and Helen Martin an associate at Stevens & Bolton
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