New legislation on pre-pack administrations which has been approved by Parliament today may have ‘missed the mark’, according to a leading North West insolvency practitioner.
The new rules will mean that ‘connected party sales’ – where a company goes into administration and its business or assets are immediately sold to a connected party such as a director – will require either the approval of creditors or be subject to scrutiny from an independent ‘Evaluator’, a newly-created role.
Allan Cadman, North West chair of R3, the insolvency and restructuring trade body, who is also a partner at insolvency firm Poppleton and Appleby, says: “We welcome efforts to improve stakeholder confidence in pre-packs, but it may be proved that this legislation has missed the mark.
“The rationale for this is clear but the practicalities around ensuring that an Evaluator is a fit and proper person is where these regulations could fall down. These regulations effectively leave it to the market to regulate the Evaluator position.
“A far better alternative would have been for the Government to agree to maintain a list of approved Evaluators. This might have meant an additional administrative burden for them, but it would have given stakeholders greater confidence that these reforms were robust rather than just the easiest option for the Government.”
Under the rules, which take effect from the end of April, an administrator will be unable to make a “substantial disposal” of company property (including hiring out or sale) to a person connected with the company within the first eight weeks of the administration without either the approval of creditors or an independent written opinion from an ‘Evaluator’, who will review the proposals and determine whether a sale to a connected party is fair and appropriate.
If neither the Evaluator nor the creditors support the proposal for a substantial disposal, the legislation does allow an administrator to proceed with the sale, but they will need to provide a statement which explains their reasons for doing so.