My Lords, noble Lords may remember that the Corporate Insolvency and Governance Act 2020 revived a power to regulate connected sales in administration, which this statutory instrument uses. Now more than ever, we need a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike, particularly as we endeavour to rebuild the economy after the challenges it has suffered from the Covid-19 pandemic. The power enables us to strengthen the regime by imposing requirements where sales in administration are made to a connected person.
A pre-pack sale is where the sale of all or part of a company’s business is arranged prior to it entering administration. The sale is then completed by an insolvency practitioner appointed as an administrator. This usually occurs on the same day or immediately after the company enters administration. Pre-pack sales are a valuable part of the insolvency landscape, representing around a third of all administrations. They can be a useful tool to rescue businesses, save jobs and preserve value. However, creditors are often
unaware of the sale until after it has been completed and this can cause concerns, particularly where the sale is to a connected person, such as a director or one of their family.
Previous criticism about whether pre-pack sales are always in the best interests of creditors led to a number of industry measures being introduced in 2015. The main aim of these measures was to increase the transparency of pre-pack sales. Key to this was the opportunity for a connected purchaser to seek an independent opinion from a new Pre Pack Pool, a group of experts able to provide an arm’s-length view on the reasonableness of the transaction. Additional measures included strengthening professional standards for pre-pack sales.
There has, however, been a very low uptake of the use of the Pre Pack Pool. Each year, since its introduction in 2015, no more than 22% of connected purchasers have sought independent scrutiny of the offer. A government review concluded that pre-pack sales remain a valuable tool for business rescue, but that industry measures had not gone far enough in restoring creditor confidence. Consequently, the Government announced in October last year that they would regulate to strengthen the legislative framework in this area, principally by requiring an independent scrutiny of pre-pack sales where the sale involves a connected person. Draft regulations were published in October 2020 to seek stakeholders’ views. I thank my noble friends Lord Hodgson of Astley Abbotts, Lady Altmann and Lady Neville-Rolfe, the noble Lords, Lord Vaux of Harrowden, Lord Mendelsohn and the noble Baroness, Lady Bowles of Berkhamsted, for their valuable contributions and useful discussions in developing the regulations further. The comments of noble Lords, along with those of other stakeholders, have been considered carefully and certain changes have been made to take account of the feedback received.
These regulations will mean that an administrator will be unable to make a substantial disposal of a company’s assets to a person connected with it without either the approval of creditors or an independent written opinion. The requirements will apply to a disposal made to a connected person during the first eight weeks of administration. The meaning of a “substantial disposal” is defined in the regulations and the meaning of “connected persons” is set out in primary legislation. To prevent the requirements being circumvented, the definition of a substantial disposal includes sales which are carried out through a number of transactions and/or where these are to different connected persons.
The definition covers not only what would ordinarily be considered pre-pack sales, but any disposal made to a connected person within the first eight weeks of administration. This is to prevent the requirements being circumvented. The independent report must be provided by an individual qualified to do so within the meaning of the regulations and that individual is referred to as an evaluator. The administrator must be satisfied that the evaluator has the relevant knowledge and experience to provide the report. Requirements are also imposed on the evaluator in respect of their independence.
Following comments from stakeholders, the regulations have been strengthened and now require an evaluator to hold professional indemnity insurance to carry out the role. In practice, the role of an evaluator is likely to be fulfilled by certain professionals such as accountants, surveyors, lawyers and insolvency practitioners, along with members of the current Pre Pack Pool who meet the requirements to be able to fulfil the role. Depending on the nature of the disposal, other individuals who meet the requirements may also be suitable to act as an evaluator. The report provided by the evaluator must include a statement that indicates whether or not they are satisfied that the sale is reasonable.
A key concern of stakeholders was the risk of shopping around for a favourable opinion since there is no limit on the number of reports a connected person can obtain. We believe that the circumstances where someone would do this will be limited due to the cost implications and likely delay to the sale. However, in response to these concerns, changes have been made to the regulations to ensure transparency where more than one report is obtained. The evaluator will be required to include within the report the details of all reports that the connected person has previously obtained. If the connected person refuses to disclose a previous report or the evaluator believes that they are seeking to conceal the existence of such a report, that must also be set out in the evaluator’s report. Once received, the administrator must consider the report, circulate it to all known creditors and file a copy at Companies House. If the evaluator’s report states that they are not satisfied that the sale is reasonable, an administrator can still proceed where they consider it is in the best interests of creditors. If that happens, they must provide a statement to creditors setting out their reasons for doing so.
In conclusion, this statutory instrument will provide greater scrutiny of sales where they are to a connected person and give assurance to creditors that such a sale is appropriate in the circumstances. I commend the draft regulations to the House.
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