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Pre-pack Sales to Connected Parties - The New Evaluator Process

As of 30 April 2021, an administrator will not be able to make a 'Substantial Disposal' to a 'Connected Person' within the first eight weeks of the administration, unless they have obtained either:

• An independent written opinion (positive or negative)
• Approval from each of the creditors

'Substantial Disposal'

This is not defined in the new regulations, however, "all or a substantial part of the company's business or assets" is a term used elsewhere in the insolvency legislation. Practitioners are expected to apply the same considerations when determining whether the pre-pack sale is a substantial disposal and should consider the value of the assets, the percentage of the business/ assets that are being sold as part of the disposal and whether goodwill is included as part of the disposal.

'Connected Person'

This is defined in paragraph 60A(3) of Schedule B1 to the Insolvency Act 1986 and includes directors, shadow directors, or other officers of the company, as well as any 'connected company'. A company will be deemed to be a 'connected company' if any relevant person of one is or has been a relevant person of the other.

An independent written opinion

The 'independent written opinion' will take the form of an evaluator's report. The new regulations require the evaluator to be independent, have no conflict of interest, and have professional indemnity insurance. Anyone who has advised the company, or anyone connected to the transaction, within 12 months of the transaction, would be thought to not have sufficient independence. Also, certain individuals (such as those convicted of dishonesty offences or those made bankrupt) are excluded from acting as an evaluator.

The evaluator's report must contain details of the assets that are to be disposed of, the consideration to be paid, whether (or not) the evaluator is satisfied that the consideration and grounds for the disposal are reasonable, and how/why they have reached that conclusion. Although the report must be in writing, it does not have to be a hard copy. The format and structure of the report is left to the evaluator. It must, however, be dated and authenticated by the evaluator, and the report must be provided by a named individual (not a company).

It is the purchaser's responsibility to obtain the evaluator's report. However, it is worth noting that the administrator cannot complete the sale (within the 8-week time period) without an evaluator's report.

As it is the purchaser's responsibility to obtain the evaluator's report the purchaser will, therefore, select the evaluator and bear the evaluator's costs. That being said, the administrator will want to be satisfied that, at the time of preparing the report, the selected evaluator had the relevant knowledge, experience, and independence. The administrator is likely to make enquiries of the evaluator in order to be satisfied that the evaluator meets the eligibility requirements set out in the regulations, which could include checking the insolvency register or an individual's professional qualifications.

If the evaluator's report is not favourable to the administrator, the pre-pack sale can still proceed. However, the administrator will need to provide statement, when sending a copy of the evaluator's report to creditors, setting out their reasons for proceeding with the sale despite the unfavourable report. The requirement to provide a statement applies either when the evaluator's report contains a "case not made" opinion or a previous evaluator's report contained such an opinion.

The Creditors' approval

The only time that an evaluator's report is not required is when approval from all of the creditors has been obtained. However, the unfortunate reality is that, by the time you receive approval from all creditors, the 8-week time period is likely to have elapsed. The administrator will need to include a statement in their proposals that they are required to send to creditors in accordance with paragraph 49 of Schedule B1. Only once creditor approval is obtained can the sale be completed.

Post-completion

Following the completion of the sale, the administrator must send a copy of the report to every creditor of the company - except for any 'opted-out' creditors. The administrator must exclude any information that, in the administrator's opinion, is confidential or commercially sensitive. The report must also be sent to Companies House at the same time as the administrator sends a copy of their proposals.

Liability for breach

The regulations do not set out a penalty for non-compliance and it is unclear what the sanction might be. However, it is likely to be considered by the practitioner's Recognised Professional Body, and could potentially form the basis for a claim for misfeasance against the administrator.

As discussed above, 'connected person' is defined in the legislation, but 'substantial part of a company's property' is not - this is left to the administrator to assess. There is nothing in the regulations setting out the sanction for getting this wrong, but if the administrator, acting reasonably, determines that the evaluator has the requisite knowledge, it is doubtful that the administrator could be criticised. Therefore, it is always prudent to obtain an evaluator's report before proceeding with any sale to a 'connected person'.

Legal advice

This article is not intended to, and does not, constitute legal advice. Forbes Solicitors accepts no liability for any losses occasioned to any person by reason of any action or inaction as a result of the contents of this article.

For more information contact Pauline Wild in our Corporate department via email. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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