In our previous commentary, we concluded that the ‘The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021’ (Regulations) had enacted a tick-box exercise for experienced market participants.
This conclusion has not changed on a review of how the market has interacted with the Regulations, despite the issuance of additional statutory guidance on 30 April 2021 (Guidance), and some earlier nervousness amongst advisors that secured creditor funded / credit bid style pre-pack purchases might be caught as sales to “connected person(s)” under the Regulations where they involve the management of the OldCo going forward. The Guidance is available here.
REGULATIONS NEED NOT RESULT IN TRANSACTION TIMING SLIPPAGE
If the evaluator's report is obtained in good time, the completion of a pre-pack (immediate sale upon entry into administration) need not be delayed by the Regulations:
“An administrator does not have to be appointed at the time the report is obtained. For example, a pre-pack sale in administration is where the sale is arranged prior to a company entering administration and completed on or very shortly after the appointment of the administrator. In those circumstances, the report should be obtained before the company enters administration so that the sale can be finalised as soon as possible by the appointed administrator.”
This works to re-inforce our assessment: the Regulations and Guidance have ultimately created a tick-box exercise for experienced market participants – especially where the report is only to be circulated to known creditors at the same time as the Administrators' proposals (i.e. at some time after the sale).
POINTS OF PRACTICE TO NOTE FROM THE GUIDANCE
The Insolvency Service issued the Guidance on the date the Regulations came into force. The Guidance considers the role of the evaluator and details the criteria (including the information the evaluator is likely to need) for taking on this role. It goes on to set-out the what the evaluator' report must include.
The majority of the Guidance in this respect flows naturally from the Regulations themselves. Certain points of practice are worth noting however – each of which should pose no difficulty for market professionals:
- proposed administrator to be satisfied as to the calibre of evaluator and scope of their insurance: “the administrator must be satisfied that the evaluator has sufficient knowledge and skills to provide the report and is eligible to act. They will also want to be satisfied that the [evaluator's] professional indemnity insurance provides a reasonable level of cover and extends to the individual for acting as an evaluator and providing the report”;
- evaluator should be proactive in chasing down the information they need: “… the connected person should provide information and supporting documents that are requested by the evaluator... Where the connected person cannot provide information which the evaluator reasonably requires then the evaluator can ask the connected person to take steps to get that information from the relevant people (e.g. from the proposed administrator or the company in the case of a pre-pack). Alternatively, the evaluator may choose to approach those people directly … It is unlikely that an evaluator would be able to satisfy themselves that a disposal was reasonable without having been provided with at least the information listed above.”;
- the evaluator may not be able to obtain commercially sensitive information straight away and should work with the proposed administrator to find a workaround: “Evaluators should bear in mind that certain individuals, for example, the insolvency practitioner, may refuse to share commercially-sensitive information. That might be the case where, for example, the information would compromise a bidding process. Where an evaluator considers that such information is needed for their report then they should discuss this with the insolvency practitioner in an attempt to find a resolution.” Despite the Guidance on point, it is difficult to envisage a situation in proper practice where an administrator in a pre-pack scenario would not be aligned with the evaluator, management, and the prospective purchaser on the use of a market-standard non-disclosure agreement to bridge this gap. Nonetheless, “Insolvency practitioners are not required to disclose commercially-sensitive information”.
- 48-hour turnaround maximum for a report expected (where sufficient information has been provided to an evaluator): in a pre-pack, the report will be provided pre-appointment in any event; and
- the proposed administrator must be satisfied as to the inclusion of all necessary content in the report and that the evaluator meets the requirements to act: regardless of the report’s conclusions, it will not be a “valid” report unless all necessary content is included. Whilst a proposed administrator could in theory be carefree as to what the report concludes, they cannot be carefree as to the substance and form of the report or its author.
