Are industry concerns taken into account in the UK’s draft prepackage regulation?
On February 24, 2021, the UK government published the Administration Bill (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (on “Regulations”), which, once in force, will require mandatory creditors approval or a valuation report before an insolvency practitioner (“IP”) can dispose of the company’s assets by means of a “pre-pack”.
The Regulations are expected to come into force on April 30, 2021 and we don’t expect the details of the Regulations to change significantly – but do the Regulations address concerns expressed by stakeholders and others? To some extent, but not as far as some had hoped.
This blog explains what an IP will need to do before a pre-pack sale can be concluded and how the Regulations have addressed the concerns.
The impact of the Regulation – dealing with a prepackage
Essentially, once the regulations are in place, a director will not be able to make a “substantial assignment” of business assets to a related party within eight weeks of commencing administration without the approval of creditors or a related party. independent written qualification report produced by an assessor (the “Evaluator”).
The assessor’s report should indicate whether they are “Satisfied that the consideration to be given for the property in question and the grounds for the substantial assignment are reasonable in the circumstances” or not. A substantial transfer is in short a transfer which concerns “all or a substantial part of the activity or the assets of the company”.
The person logged in is responsible for obtaining the independent qualification report and must provide a copy of the report to the administrator.
However, it should be noted that even though the Independent Qualifying Report indicates that a Substantial Assignment Case has not been presented, this does not prevent the Administrator from proceeding with the sale to a Related Person. The administrator in this situation is simply required to provide a statement explaining why he is making the material disposition.
Identity of the assessor
Following the publication by the government of a draft regulation for comment last year (see our previous Blog) Stakeholders and insolvency practitioners have expressed a number of concerns, particularly with regard to the identity of the assessor.
Concerns were expressed that the qualification requirements for the assessor were not substantial enough, in that the bar was not high enough to determine who could be an assessor and, therefore, it was not. would not give creditors confidence. The draft regulation simply provided that the appraiser must believe that he possessed the “requisite knowledge and experience” to give an opinion and that the administrator must have no reason to believe that the appraiser did not have the necessary skills. knowledge and experience required. The assessor was not required to have professional qualifications.
Has this concern been addressed in the Regulations? To a certain extent an appraiser will be required to have professional liability insurance, but the Regulations do not require the appraiser to have professional qualifications – the fact remains that the appraiser is the deciding person. that he has the “required knowledge and experience.” ‘to prepare the report.
Another concern raised was that related persons may buy opinion in order to obtain a favorable qualifying report, reducing creditors’ confidence in the process. The Regulations attempt to address this problem by requiring an assessor to confirm in their report that they have received a copy of any previous report or, if a previous report is not provided, the assessor should take this into account in their report. giving the reasons why the previous report was not obtained and steps were taken to obtain it.
The Regulations also provide that if a related person declares that no previous report has been obtained, the assessor must include a statement in his report to this effect.
However, it appears that several of the comments and issues identified in the October 2020 draft regulation have not been addressed adequately or at all.
For example, many wanted an exception to be included in the definition of “related person” in the Regulations for secured lenders. The argument put forward was that secured lenders are not part of the company or related to it in the same way as other related people, for example shadow directors and related companies. Therefore, they are not responsible for the failure of the business. Likewise, there are other regulations and legal controls that limit the risks posed to creditors by a secured lender involved in the substantial assignment. Despite the points raised by interveners, this exception was not included in the Regulations.
Responsibility for the report
Another concern that has not been adequately addressed is that it should be the administrator and not the related person who should obtain the independent qualifying report.
It has been suggested that administrators are best placed to assist the evaluator, as administrators have technical experience and may have key information that is useful to the evaluator. However, this recommendation was not included in the regulations and the obligation to obtain the report remains with the related party.
What is a substantial assignment?
Comments were also made regarding the definition of “substantial elimination”. It was suggested that the term “substantial” be defined more precisely, but this notion was rejected on the grounds that what amounts to a “substantial assignment” will vary depending on the nature and size of the business concerned and because the Insolvency practitioners are familiar with the term as it is commonly used in other insolvency laws.
To conclude, some useful amendments and additions have been made to the draft law published on February 24, 2021, compared to the previous draft published in October 2020. However, several concerns that could have contributed to improving creditors’ confidence in the process did not have not been included and so it remains to be seen how successful the Settlement will be in increasing creditors’ confidence in the prepackage sale process once it goes into effect (as planned) on April 30, 2021.
This article was written by Luke Carney.
© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume XI, number 64