On 24 February 2021, the government published new draft Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (the Regulations), following the consultation process conducted in late 2020. The Regulations are still to be debated by Parliament, but are expected to come into effect on 30 April 2021 with few substantive amendments.
The Regulations will apply in circumstances where an administrator is proposing to make a substantial disposal of a company's business and assets to a connected party within eight weeks of their appointment. The Regulations can be seen here.
While the Regulations are clearly intended to address the often wide-spread concern that administration sales to connected parties - and particularly "pre-pack" sales - lack sufficient transparency to reassure creditors that the sale is in their best interests (as considered in our earlier article), many question the tangible impact that the Regulations are likely to have in reality.
The pre-pack pool v the Regulations
The pre-pack pool (the Pool) was introduced in 2015, following the Graham Review, in order to address some of the criticisms levied at pre-pack sales to connected parties. The Pool comprised a group of independent "experts" whose role was to consider referrals made to it in relation to pre-pack sales to connected parties, providing some level of independent oversight of these transactions. Crucially, referrals to the Pool were on a voluntary basis and, perhaps unsurprisingly, it has therefore been hugely under-utilised. The Regulations will go some way in addressing this issue, given that purchasers in connected party transactions falling within the scope of the Regulations will have a mandatory obligation to seek a report from an independent "evaluator", who will consider the nature of the proposed deal, including whether it is fair and appropriate in the circumstances.
While referrals to an evaluator will become compulsory for a purchaser in relation to certain connected party transactions under the Regulations, the referring party will not, however, be bound to act in accordance with the opinion of the evaluator; as is currently the case with opinions issued by the Pool. This clearly raises the question of whether the additional costs and time that will inevitably need to be factored in to transactions, due to the requirements under the Regulations to obtain a report from an evaluator, will have any real tangible impact.
The Regulations still also expressly permit "opinion shopping", whereby a prospective purchaser may obtain more than one report from an evaluator - this perhaps might lead to several reports being obtained until the issue of one that is deemed sufficiently favourable. While there are certain disclosure requirements under the Regulations relating to earlier obtained reports, this ability for purchasers to effectively "shop around" does little to foster the notion that the Regulations will increase the level of objective scrutiny of pre-pack sales (to connected parties).
The role of the evaluator
One of the key criticisms of the Regulations raised by many in the insolvency sector - including the industry body, the Association of Business Recovery Professionals (R3) - is the lack of guidance concerning the necessary qualifications of the evaluator.
While the Regulations, as originally drafted, provide that an evaluator must be independent from the administrator and purchaser and should believe that they have the requisite skills and experience to provide the report, there was no further qualifying criteria - for example, a requirement for the evaluator to be a member of a recognised professional body.
In an amendment to the earlier Regulations, there is now a requirement that an evaluator should have adequate professional indemnity insurance in place. This will, by implication, mean that any individual fulfilling this role will have to be involved in the provision of professional services in some formal capacity. The position remains, however, that the proposed evaluator need only believe that they have the requisite skills and experience for the role (and the associated administrator not having a contrary view). However, is the requirement for an evaluator to hold professional indemnity insurance alone sufficient to ensure the relevant individual has the skills and experience to carry out the role?
R3 have lobbied for stricter eligibility criteria for the role of evaluator. Among other things, it has suggested that there should be some form of government oversight as regards those acting as evaluators - for example, by having a centralised register of "approved" individuals suitably qualified to accept this role. R3's concern being that without this oversight, and some form of established framework capable of ensuring that those acting as evaluators have the skills and experience to do so, the Regulations are likely to do little to improve stakeholder confidence in pre-pack administration sales to connected parties.
Whilst the Pool was not a perfect model of regulation, it did at least have members whom were recruited as part of a public recruitment process, ensuring some scrutiny as to the qualification - in terms of skill and experience - of those issuing opinions. Without the provision of further government oversight, it might be the professional indemnity insurers who ultimately determine who can, and cannot, act as an evaluator pursuant to the Regulations.
Tim Carter, co-head of the restructuring and insolvency department at Stevens & Bolton comments:
"Whilst some form of government regulation of evaluators will clearly impose a further administrative burden (particularly at a time when public finances are already stretched to their limits), this may well be necessary to give market participants true confidence in these Regulations, and critically the key role of the evaluator.
The introduction of the requirement, within the latest draft of the Regulations, for evaluators now to hold professional indemnity insurance is certainly a step in the right direction. However, this will not necessarily mean that those tasked with considering connected party transactions under the Regulations will have the requisite expertise and business experience. This risks undermining the very reason for the introduction of the Regulations in the first place - namely, to increase stakeholder confidence in the regulatory framework surrounding pre-pack sales to connected parties. Without such confidence, the Regulations will inevitably fail to achieve their primary objective even when they become law".
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