In recent months there has been a noticeable increase in the number of pre-pack administrations across the UK, especially where the sale is to a connected party. This trend has attracted significant attention from our fellow insolvency practitioners, businesses, and stakeholders alike. While pre-pack administrations offer a streamlined process for distressed companies, there are concerns regarding the appropriateness and effectiveness of the evaluator’s report.

Pre-pack administrations involve the arranging of a sale of a company’s business and assets before administrators are formally appointed. The sale is then completed within hours of the administrator being appointed. 

This process allows for a quick transfer of ownership, often preserving the value of the business and saving jobs. The speed and efficiency of pre-pack administrations make them an attractive option for companies facing financial difficulties.

This speed and efficiency though, has to be balanced with a need for stakeholders and the public at large to be confident that the best deal has been achieved and, especially when the sale is to existing management, that there hasn’t been some kind of “stitch-up”.

With this in mind, the pre-pack pool was introduced in 2015 and was a voluntary process designed to provide greater transparency and confidence in pre-pack transactions.

The purchaser in a pre-pack sale to a connected party could submit their proposals to the pre-pack pool for review. The pool then provided an opinion on the appropriateness of the sale, offering a level of oversight intended to reassure creditors and stakeholders.

Despite its intended purpose one of the primary concerns was the voluntary nature of the process which led to situations where connected party sales bypassed the scrutiny that the pool was meant to provide.

Given these concerns, The Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 (the Regulations) were introduced.

Under these Regulations, an administrator must not make a substantial disposal to a connected party within 8 weeks of appointment unless either the approval of the company’s creditors or a qualifying report in respect of the disposal has been obtained.

This qualifying report can be obtained from an evaluator who is an individual with, it is hoped, the necessary skills to review the sale. 

These individuals range from Business Consultants to Solicitors and the pre-pack pool, but there is growing concern that there is no requirement for an evaluator to have any specific qualifications, together with the risk of over-familiarity.

Although stakeholders can now have greater confidence in the integrity and appropriateness of pre-pack administrations the reality is that no matter the stringent nature of the process, there are always going to be concerns raised, understandably, by those who have lost money during the process. 

The only way of avoiding that is to ban connected party sales altogether and that would risk undermining the strong rescue culture that we have built in the UK as existing management are often the keenest (will pay more) buyers.

Either way, the rise in pre-pack administrations is a clear indicator of the challenging economic environment businesses currently face.

For more information about pre-pack administrations, contact our expert Restructuring and Insolvency team.