Pre-Packs and the Proposed Changes

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What is a “Pre-Pack”?

A “pre-pack” is short for “pre-packaged” and relates to the ability to sell the business and certain assets of an insolvent business immediately following the appointment of an Administrator. The benefit to a pre-pack is that it can save jobs, it is cheaper and less risky than an Administrator trading the business and therefore is seen as an effective rescue tool.

Historic connected party issues with Pre-Packs

There has always been doubt expressed by stakeholders where a business is sold to a connected party, especially around fair value, and the Government, therefore, commissioned the Graham Review, which published its findings in 2014. Following on from this report, a number of changes were introduced to make the process more transparent, which included additional marketing requirements and the Pre-Pack Pool. In addition, the requirements around the reporting process were tightened up, with the Administrator’s Statement of Proposals being required to be issued to creditors within seven days of the transaction completing (whereas previously details of the transaction were usually circulated in the form of a letter to creditors).

The Pre-Pack Pool

The idea behind the Pre-Pack Pool (“the Pool”) was that connected party purchasers could seek the opinion of the Pool prior to the transaction taking place, with a viability statement being provided to the Pool to give comfort that the new business would be viable (this was based upon research that demonstrated that more pre-packs to connected parties subsequently failed than did those to unconnected parties). This would then be reported to creditors following the transaction completing (in the Administrators’ Statement of Proposals). Unfortunately, this concept never really got any traction, with referrals to the Pool decreasing from 22% of connected party transactions in 2016 (36 out of 163) to 9% in 2019 (23 out of 260 connected party transactions, albeit up slightly from 7% in 2018).

Part of the issue for it not being utilised was that it was not mandatory and the transaction would still be able to go ahead whether the Pool agreed or not. Given that there was also a cost involved (currently £950 plus VAT), obtaining the Pool’s opinion was perhaps not given the importance it might otherwise have found.

The Proposed changes to sales to Connected Parties

Draft legislation is currently going through Parliament to bring in major changes to how insolvency practitioners will be required to conduct pre-pack sales to connected parties. In short, the legislation states that an Administrator cannot sell a business to a connected party before a period of 8 weeks has elapsed from the date of their appointment unless creditors have approved the transaction or an Evaluator has provided a report on it.

Creditor approval

At the moment, an Administrator is required to provide details of the transaction to creditors, with their Statement of Proposals, within 7 days of the transaction completing, following which approval for the Proposals will be sought. The proposed changes will require that creditors are provided with details of the proposed transaction (i.e. not a completed transaction) upon which they will then be asked to vote. The requisite notice of the decision is a minimum of 14 days, so an Administrator is looking at being in office for at least 14 days (in reality, given the time it takes to prepare proposals, this period is likely to be nearer 21 days) before the transaction can be approved.

The Evaluator’s role

The second major change is for the option for an Evaluator to provide a report. There is mention that the Evaluator will need to have professional indemnity insurance and the “requisite knowledge and experience to provide the report”. This appears to be the replacement for the Pre-Pack Pool detailed above. The Evaluator will be chosen by the connected party, and will be required to provide a report to the connected party, who in turn will then provide that to the proposed Administrator.

What does the report look like?

The report will include a statement confirming that the Evaluator meets the requisite standard and has professional indemnity insurance (including the details thereof). The report will then talk about the assets involved in the “substantial disposal” (i.e. details of the assets being sold as part of the transaction – which can be in one go or over a period of time), details of the connected party and their connection to the purchasing company, the consideration being provided and, whether the Evaluator believes that the grounds for the disposal are reasonable or not (which is called a “case made conclusion” or a “case not made conclusion”). The contents do seem very similar to the details officeholders are required to provide under Statement of Insolvency Practice 13 with regards to connected party transactions.

Is the Evaluator’s decision final if there is a “case not made” conclusion?

No. Ultimately, the Evaluator has to provide their report but it is up to the Administrator as to whether they proceed with the transaction. The Administrator will have to advise creditors as to why the transaction proceeded when the Evaluator was not satisfied with the grounds for the disposal, but that is all.

This legislation is due to come into force after 30 April 2021.