Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (Regulations) apply to pre-packs, where the administrator intends to dispose of a substantial part of the company’s business or assets to a connected person within 8 weeks of the start of the administration.
What is a pre-pack?
A “pre-pack” is a planned insolvency procedure where the sale of the company’s business and assets is negotiated with a buyer prior to the appointment of an administrator then completes immediately or shortly after the administrator’s appointment. They are an important and useful tool to achieve a rescue of a business as a going concern.
Why are they controversial?
They have been labelled as controversial over the years, when the business and assets are sold to a connected party, because creditors do not find out about the arrangement until after the event.
In order to tackle this perceived lack of transparency and criticism by creditors, the “Pre-pack Pool” was set up in 2015 to allow proposed pre-pack sales to connected parties to be considered by an independent person from the Pre-pack Pool and a view given as to whether the proposed transaction was appropriate. Referral to the Pre-Pack Pool was voluntary and consequently take up was low.
What are the new rules?
The introduction of the Regulations means that it is now mandatory for either:
- an administrator to obtain prior creditor approval to the proposed sale; or
- the buyer to obtain a report from an “Evaluator” on whether the grounds and consideration for the sale are reasonable
whenever an administrator proposes to sell a substantial part of the company’s business or assets to a connected person within 8 weeks of the start of the administration.
A summary of the requirements is set out below.
Statement of Insolvency Practice 16 (SIP16) has been updated and issued to insolvency practitioners accordingly.
You can download the update here – R3 update new pre-pack legislation published.