Pre-pack administrations are an excellent tool available to company directors. It provides a unique method of handling an insolvent company, allowing directors to repackage an unprofitable company into a new, viable entity. However, this is a double-edged sword; while pre-pack administrations can rescue an ailing company, how it does so has led to considerable scrutiny. Pre-pack administrations are infamous for their lack of transparency, while enabling unscrupulous directors a means to abuse the procedure. As such, creditors tend to get a raw deal, often losing their capital if the debt gets written off.
Largely in response to this issue, the government has implemented a set of new regulations that aim to remedy these issues. These regulations were introduced under the Administration (Restrictions on Disposal etc… to Connected Persons) Regulations 2021. This set of regulations came into force on 30 April 2021. In this article, Clarke Bell will outline these new regulations, discussing how they impact directors looking to perform a pre-pack administration.
What is a pre-pack administration?
As we mentioned, a pre-pack administration offers directors a means to rescue an ailing company. It does this essentially through creating a new company out of an old one, being most effective when a company has a viable business model, but needs a new, reorganised company to implement this model.
Pre-pack administrations usually take place without any advertisement, with a sale being discussed and agreed upon behind closed doors. This is done to avoid the negative impact an insolvency announcement has on the value of a company. Moreover, the procedure’s speed decreases other expenses, such as administrative costs. Personnel and connections are also maintained, partially due to this speed, and partially due to the company’s financial state being kept quiet. Naturally, these benefits are substantial for a company in a difficult financial position.
However, these advantages are offset by a substantial disadvantage, namely a negative public image. The pre-pack administration procedure is terrible for transparency, making it a lightning rod for public criticism. This is especially true when connected parties, such as company directors, are a part of the deal. Old company directors buying up assets for the new company doesn’t look great from the public’s perspective, nor from the perspective of potential creditors or business partners. As such, the aforementioned regulations were the result.
Related: The Pre Pack Administration Process
New sale conditions brought in by Administration Regulations
One of the fundamental changes made by the Administration Regulations 2021 is the new set of sale conditions. In the past, pre-pack administrations could be made without much oversight or justification. Now, this is no longer the case. The new pre-pack regulations compel company directors to meet a number of conditions before any meaningful disposal of company property can take place. However, this limitation only applies if the purchaser is connected to the company in some way, such as existing company directors. These conditions make two main points; directors must either obtain the consent of outstanding company creditors, or obtain the approval of an independent evaluator. If the directors cannot do either, the pre-pack administration cannot take place.
Criteria for the evaluator’s approval
If directors cannot obtain the consent of creditors to make the sale, they must instead bring in an independent evaluator. This evaluator will assess a number of different factors regarding the sale, with an emphasis on why the disposal is taking place. If the justification is not considered to be reasonable, the evaluator will not give their approval for the sale.
The evaluator will be considering the following criteria:
- The connection between the company and the potential buyer.
- The company itself, along with any assets being disposed of.
- Justification for making the disposal.
- Any relevant reports.
- The evaluator’s qualifications.
Once the evaluator has considered the relevant information, they will document their opinion in a report. This report will then be handed to the administrator, who must consider this opinion carefully. While they don’t necessarily have to abide by the opinion of the evaluator, the administrator must provide a compelling reason for disregarding disapproval. The same is true for the potential buyer; if they disagree with the evaluator’s assessment, they can ask for multiple opinions if they choose. The request for multiple reports, in addition to the findings of these reports, will be included in subsequent assessments. As such, the more reports are requested, the harder it will be to obtain a positive evaluation.
Although the evaluator is supposed to provide an opinion, the evaluator must meet specific requirements to be able to draft a valid report. Firstly, the evaluator must not be connected to the company in question. They must also not be connected to the administrator, have been convicted for fraud, or currently be bankrupt, as stipulated by the new set of regulations. In addition to being completely independent, evaluators must be professional. While they are not exactly required to have a certain level of qualification, the administrator is obliged to check if the evaluator is of questionable capability. This can then be used to regard the evaluator’s report as “unqualifying,” which will nullify the sale of the company or its assets.
Because of the above, it is important for directors or buyers to use a qualified and professional evaluator. Using an unqualified evaluator might be an easy way to streamline the assessment, but it can lead to a much longer process if the report is deemed as “unqualifying.” In the worst case, asking for secondary evaluations may make it harder to approve the pre-pack, proving quite the obstacle. As such, it isn’t really worth the risk. Instead, it would be better to use a qualified and trustworthy evaluator to negate this risk.
Let Clarke Bell help
If your company is in a difficult financial position, then let Clarke Bell help you find a solution. We have over 27 years of experience in helping companies through tough financial times, and we can do the same for yours. Whether it be a pre-pack administration, a formal liquidation procedure, such as a Creditors’ Voluntary Liquidation, or another solution, our expert team is more than up to the task. Contact us today for a free, no-obligation consultation and find out what we can do for you.