New rules on pre-pack sales to connected parties from 30 April 2021

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.

For more help and specialist insolvency and restructuring advice, contact the Banking and Finance team for a free consultation.