Pre-pack sales have long been criticized by certain stakeholders for allowing the phoenix to rise from the ashes having shed its liabilities. However, they remain a popular restructuring tool, and given the current economic climate, we are likely to see an increased number of pre-pack insolvency sales in the next few years. In brief, a pre-pack sale involves the marketing of a business prior to its insolvency and the sale of the business and assets of the company by an insolvency practitioner immediately following his or her appointment. Pre-packs are particularly controversial where the business and assets of a company are sold to connected parties (e.g., directors, officers, shareholders, and affiliates). The Graham Review led to the creation of the pre-pack pool, an independent body that offers an opinion on pre-pack purchases. As submissions are voluntary, there has never been a strong take-up. In 2019, submissions dwindled to just 8% of all eligible transactions, leading the pre-pack pool to question its own future viability. In response, the Secretary of State has published draft regulations aimed at improving the scrutiny of sales by administrators to connected persons.
The regulations apply on a disposal by a company in administration of all or a substantial part of its business or assets to a connected person within the first eight weeks of the company's administration. An administrator is prohibited from making such a disposal unless either: (i) he or she obtains the approval of the company's creditors; or (ii) the buyer obtains a report from an evaluator who states whether he or she is satisfied that the consideration and the grounds for the disposal are reasonable in the circumstances.
The evaluator must be independent and qualified, meaning that the evaluator must self-certify that he or she has the requisite knowledge and experience to provide the report. The administrator must have no reason to dispute this.
The regulations permit the buyer to obtain more than one report, but all reports must be disclosed to the company's creditors. If none of the reports is favorable, the administrator must explain his or her reasons for proceeding with the disposal.
The regulations seek to instill confidence that the process is fair and transparent and achieves the best outcome for creditors. However, given the nature of administration sales, in most circumstances there is unlikely to be sufficient time to seek creditor approval. Absent creditor approval, while the requirement to obtain an independent report will add credibility to the pre-pack process, in the current economic climate, the time required to obtain such a report could be prohibitive; some businesses with inadequate liquidity to satisfy liabilities while a report is being prepared may fall into liquidation and not be rescued on a going concern basis. This would be an unwelcome result, but it highlights the difficult balance required, given the goal of ensuring that, if pre-pack sales in their current form are to continue, they must be credible and stand up to scrutiny in the best interests of all stakeholders.