Our Thoughts on the Government Review of Connected Party Sales in Administration

04 March 2021

We note with interest the Government’s intention to regulate connected party sales in administrations, see link:

The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (legislation.gov.uk)

Interestingly, the restrictions proposed are not actually limited to pre-packs. Instead, they cover substantial disposals to connected parties within 8 weeks of entering administration.

It is possible for such a transaction to be sanctioned by creditors, by way of a decision making process; or the connected party can get an independent party to evaluate the offer and provide a written report to the administrator. With that report the administrator can complete the transaction, but there are some concerns that we have with this process:

·         If creditor approval is sought then commercially sensitive information may need to be provided, that the parties may not wish to disclose. The process will take time to put to creditors too, and deals may collapse in the interim as goodwill and intellectual property may diminish;

·         Assuming that the creditor sanction process is not desirable, the administrator is likely going to be asked to recommend a suitable evaluator, and that may cause perceptions of conflict of interest;

·         There is no barrier to the sale completing if the evaluator does not approve it, the administrator can simply explain why the transaction was entered into despite a negative report;

·         It isn’t apparent that the report will consider any other benefits of the transaction, such as retained employees, or the fact that there may not be any better offers, and instead focusses on consideration and price paid as the only metric of desirability.

The practice of administrators selling assets of insolvent companies to the directors has always been controversial, but done properly it is often the best way to secure the best return for creditors and maintain employment of workforce. Pre-packs are a useful tool and done properly the process can achieve balance between the need to rescue the business and protecting creditors interests.

There is already guidance on the steps that practitioners must take when considering a pre-packed sale (Statement of Insolvency Practice 16) and when selling assets to connected parties (Statement of Insolvency Practice 13).

The key to maintaining creditor’s buy in is to ensure that the company undertakes proper marketing of the business and assets, conducted by an independent qualified agent with the remit to market widely and contact competitors and other likely interested parties.

If regulators and legislators were concerned about malpractice when conducting connected party sales then they had the remedy to remove licences from practitioners that didn’t comply. It is difficult to see the advantages to this legislation. Allied with the recent return of Crown Preference, this feels like another attempt to hamstring the rescue culture. 

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