Regulations to require scrutiny of pre-pack sales to connected parties in administration
Steven Wood takes a look at the UK Government’s soon to be laid regulations to require scrutiny of pre-pack sales to connected parties in administration.
The UK Government last year announced its intention to use the power in the Corporate Insolvency and Governance Act 2020 to require independent scrutiny of pre-pack sales in administration to connected parties.
An article was published at the time which provides some commentary on the report and draft regulations.
Feedback on the draft regulations was invited last year. Following a review of that feedback, revised regulations are expected to be laid shortly. The regulations will be laid under the affirmative procedure meaning that they must be actively approved by both Houses of Parliament.
Although publication of the regulations is awaited, the Insolvency Service (‘IS’) has provided feedback to stakeholders, including ICAS, on the content of the draft regulations to be laid.
IS received a total of 15 responses following its request for feedback on the original draft regulations. This primarily focussed on the following areas:
- Concern about the ability of the connected person to ‘opinion shop’ for a favourable report.
- Concern about the lack of requirements as to qualification of the evaluator.
- Inconsistency between the definitions of connected persons in SIP 16 and the draft regulations (specifically the inclusion of certain secured lenders).
- Responsibility for obtaining an opinion sitting with the connected person rather than the insolvency practitioner.
- The definition of 'substantial’ in the context of a ‘substantial disposal’ being too widely drawn.
- What the evaluator is expected to assess to determine whether the grounds for a substantial disposal are reasonable.
Most of the concerns have been dismissed with reasons summarised as follows:
- IS was not persuaded that there was sufficient evidence to create a specific exemption for secured lenders, akin to the carve-out in SIP 16, meaning secured lenders may be caught within the definition of a “connected person” for the purposes of the regulations. IS does not believe that the lack of exemption should have a significant impact.
- IS concluded that responsibility for obtaining the opinion should remain with the connected person as that party is best placed to provide the information the evaluator will require, the IP is not appointed until administration so sales could be delayed, and it is inappropriate for the cost to be borne as an expense of the administration.
- IS considers that IPs are experienced in what is ‘substantial’ and it is a term used elsewhere in insolvency legislation without further definition (e.g., in the Insolvency Act 1986).
- It will be for the evaluator to determine exactly what information they require to be able to reach an opinion as to whether the grounds for the substantial disposal are reasonable as no two businesses are exactly the same.
However, there will be some changes to the draft regulations as a result of the feedback received, most notably:
- To address the concern about the ability of the connected person to ‘opinion shop’ for a favourable report, the regulations will require the evaluator to state in the report that they have considered any previous report obtained.
- In relation to the concern about the lack of requirements as to qualification of the evaluator, the regulations will be tightened to specify that the evaluator requires professional indemnity insurance (PII) that will provide them with cover in the role of evaluator. The Insolvency Service believes that this requirement provides a proportionate response and is unlikely to result in additional costs being incurred by those likely to be appropriately qualified to undertake such assignments, as almost all will already have and be required to hold PII as part of a wider professional requirement. The administrator will also need to be satisfied that the evaluator has sufficient knowledge and experience to produce the report. Guidance is to be provided for administrators to help them understand what they would need to do to meet this requirement.
With the exception of the requirement for PII cover, the tweaks to be made to the draft regulations are relatively minor in nature and the commentary provided in last October’s article remains largely relevant.
There will remain no limit to the number of reports that can be obtained and the administrator will still be able to proceed with a sale notwithstanding an adverse opinion. Consequently, an additional requirement for the evaluator to state in the report that they have considered any previous report obtained seems to be of little practical relevance.
As noted above, a requirement for PII cover will likely be of little impact to existing accountants and insolvency practitioners, as they should be covered by their existing PII. However, it may be that any new providers will find the cost of such cover prohibitively expensive when weighed against what is likely to be a relatively low value and narrow pool of work.
The Joint Insolvency Committee is already working on a revised SIP 16 to take account of the new legislative provisions and this is expected to be issued in time for the new legislation becoming effective.
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