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The Death of Pre Pack Administration to Connected Directors & Shareholders?

Written by Keith Steven Managing Director 24 March 2021

The Death of Pre Pack Administration to Connected Directors & Shareholders?

The UK rescue culture is going to be so important when we eventually deal with the massive debts building up behind the UK’s artificially low company insolvency rates.  Post Covid-19 lockdown and the return to normality, how will companies service bounce back loans, CBILs, arrears of rent and the huge £85bn of VAT & PAYE tax debts, whilst trying to learn to walk, never mind run?

Many accountants, advisors, turnaround specialists may tell you that they think your business (or your client’s business) could benefit from a pre-packaged administration sale, to a “newco”, owned by the same directors or shareholders.

After new law was approved yesterday, 23rd March 2021, that may be much less appropriate advice. It may be time to think about alternative strategies such as trading in administration - with a sale to connected or unconnected parties, voluntary liquidation with the goodwill/assets being sold to newco, or a company voluntary arrangement (CVA) that can keep the company intact, maximise creditors interests, allow deep restructuring and, in time, preserve shareholders positions.

The handily named Regulation of Pre-Packs The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 becomes law from 30th April 2021. What this new legislation imposes on pre-pack sales is tougher controls, which are likely to leave connected party pre-pack sales fraught with difficulties.

The new regime states administrators cannot make a substantial disposal of the company's business to connected directors, or shareholders, in the first 8 weeks of the administration period unless (a) the creditors approve the transaction, or (b) they have a qualifying report from a qualified independent “Evaluator”.

A report must be prepared by the said independent Evaluator, a position we know very little about at this stage. He or she must have sufficient relevant knowledge, experience, and appropriate professional insurance cover. Amongst other things, the report must state the value being paid (the consideration), the identify of the connected person or companies, and that the consideration and grounds for the substantial disposal are reasonable. The Evaluator must set out the reasons behind their conclusions, and the evidence they have relied on.

Since the introduction of administration under the Insolvency Act 1986, sales by administrators, without creditor approval, have often caused controversy when sold to connected directors, shareholders or venture capitalists (an example is Edinburgh Woollen Mill).   The concern has always been that directors and “owners” could simply “flip” the business through a pre-pack, walk away with the assets, and leave the creditors with, at best, a small dividend. Now that HMRC is a secondary preferential creditor, trade suppliers can often be left with nothing.

So, will pre-packs to trade buyers – independent parties – continue? Yes, we believe this will still be a powerful option where smart directors know that the insolvent and threatened company needs to sell the business and assets to a well-capitalised buyer.  But the pre-packaged sale to the incumbent directors or owners looks to be a much more difficult option. It is very likely now unavailable, at least until we know more about the Evaluator’s role, common practice and resultant Court case decisions.

Will trading administrations become more popular?

The risk for the administrator is that if a business sale cannot be achieved in time, then employee costs, tax, rent, non-domestic rates and so on will all have to be met as a cost of the administration. So, the risk of trading for weeks can be substantial. Our view is that it is unlikely that small companies will be suited to trading administrations. Pre-packs are soon to be highly regulated and therefore much more difficult when selling to connected people.

Is CVA a better option?

Insolvent companies facing the need to “right size” their costs, employment numbers, leases, shops, offices, contingent liabilities and survive the Covid crisis, need to consider either a)  selling the business to a well-capitalised buyer through a compliant pre-pack or b) putting the company into a CVA which can be hugely flexible and powerful.

Creative CVA architects can design CVA schemes which ensure survival. New capital can be introduced to the slimmed down business, and debt can be largely discounted, and massive cost savings imposed. Hiving of some, or all, business activity to group companies can ensure credit ratings are available.

As ever, getting the right advice EARLY enough is key to having all options available for directors and shareholders to consider carefully in order to meet the overall company rescue objective.

: Pre Pack Administration Process and Procedures

Keith Steven

The Author

Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners

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