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On 29th March 2021, in response to mounting criticism of pre-pack sales in administration, the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021, were made and come into force on 30th April 2021 and bring about significant changes to sales to connected parties in Administration.

Michael Drumm and Shauna McStravick explore what a pre-pack sale is and how it is set to change.

What is a pre-pack?

A pre-packaged sale refers to the sale of the assets of a company in distress to a purchaser which is agreed prior to the company going into administration. When the sale is agreed, the company is put into administration and the administrator completes the sale on or following their appointment.

Why might a pre-pack be the right solution?

In some cases, it is both commercially astute and beneficial to creditors for a sale to happen quickly, for example to protect the goodwill and reputation of the business by a seamless transfer of the trade. In many cases, it protects the value of the business and reduces the professional costs of a trading administration or liquidation.

However, pre-packs have suffered a lot from negative publicity. This is due to a perceived lack of transparency, and as a result of the unrest surrounding pre-packs, the Government introduced various safeguards designed to help regulate the pre-pack sale process.  Despite the implementation of the “pre-pack pool” by the Government in November 2015 and the increase in pre-pack sales to connected parties since this date, the Government has found that the number of applications to the pool has been far less than it had anticipated. Furthermore, a review by the Government of the statements filed by insolvency practitioners (SIP 16 statements) justifying to creditors why a pre-pack sale was the chosen option, were found to have been of varying degrees of quality.

What is set to change?

The purpose of the legislation is to provide greater confidence in pre-pack sales to connected parties, removing the perception that these sales are not always in the best interests of creditors.

The legislation proposes that an administrator cannot dispose of the business, or a substantial part of the business, to a connected person in the first 8 weeks of the administration, unless written creditor approval or a report from an “Evaluator”, has been prepared.

The report from this independent evaluator will be provided by the connected purchaser and will state their opinion on the sale whether positive or negative.  In the instance that the opinion is against the pre-pack sale, the administrator is not barred from proceeding with the sale but will be required to outline the reasons for doing so.

To conclude

Government statistics confirm that nearly a third of businesses saved out of administration are by way of pre-pack sale, evidencing its importance as a tool to aid business recovery. The legislation’s intention for increased visibility and independence surrounding pre-pack sales is likely to be welcome news for unsecured creditors.  The insolvency profession will also be pleased that the Government does not propose to go as far as banning connected sales. 

Recent Government policy changes indicate a move towards a more rescue-orientated restructuring culture to save viable businesses, and it is likely that this shift will be needed to address the unique nature of the upcoming economic environment.

Indeed, when Government assistance comes to an end, the requirement for flexible restructuring tools will undoubtedly rise and it is likely that the number of "pre-pack" administration sales will also increase.

Whilst the desired transparency driving the changes to pre-pack sales to connected parties will be welcome, overseeing this may add further cost and delay and it is hoped that in reality this does not prove to be at the expense of business rescue.

For more information, please get in touch with Michael Drumm or Shauna McStravick.