6.6 Pre-packs & connected party disposals

Question 1

What is the SIP 16 definition of a pre-pack?

Answer 1

“… an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator and the administrator effects the sale immediately on, or shortly after, appointment.”

SIP 16 applies to all pre-pack, not just connected parties.

Question 2

What safeguards does SIP16 incorporate?

Answer 2

 SIP applies to all pre-pack –not just connected party disposals

 Administrator to provide sufficient information in the SIP16 statement such that a reasonable and informed 3rd party would conclude the sale was appropriate and the IP has acted in creditors’ interests

 “Connected person”definition extended to include any connection with directors, shareholder, secured creditors or their associates

 Explain why the pre -pack was undertaken and alternatives considered
 Make required disclosures with 1st notification to creditors
 Marketing essentials
 Valuation by appropriate independent valuers, with PII cover
 External scrutiny via Pre-pack pool [PPP]
 Append PPP opinion to SIP16 report

 Creditors should be confident that the insolvency practitioner has acted
professionally and with objectivity

Question 3

What did The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 – 30 April 2021bring into force?

Answer 3

Apply to “substantial disposal”by an administrator
 To one or more connected persons
 Within first 8 weeks

 Disposal restricted unless:
 Approved by creditors; or

 The connected person obtains a report from an independent evaluator
 Administrator to send copy to the creditors and Registrar, with the proposals

 Can still proceed if negative –subject to an explanation being provided

Question 4

What are the IP’s duties in a pre-pack?

Answer 4

Objectives of administration must still be achieved

 Ensure market value achieved
 Noting perception where a connected party purchaser
 Comply with ethical standards and regulatory requirements
 Ensure transaction at arms length
 Must be satisfied that appropriate marketing has taken place
 Provide detailed information on valuation, marketing and sales strategy
 Able to justify actions and decisions
 Record context in which decisions made

Question 5

SIP 16 - what work is not included in the IP’s role?

Answer 5

IP should make it clear that the role is not to advise the directors or any parties connected with the purchaser
 who should be encouraged to take independent advice

Question 6

What is a viability statement?

Answer 6

“A viability review can be drawn up by a person connected to the insolvent entity wishing to make a pre-packaged purchase, stating how the purchasing entity will survive for at least 12 months from the date of the proposed purchase. The prospective purchaser should consider providing a short narrative detailing what the purchasing entity will do differently in order that the business will not fail (the viability statement).”

 If a viability statement is provided, it should be attached to the SIP16 report

Question 7

What are the SIP 16 marketing essentials?

Answer 7

 Broadcast–the business should be marketed as widely as possible proportionate to the nature and size of the business

 Justify the marketing strategy – explain reasoning
 Independence–can’t necessarily rely on previous marketing by company
 Publicise rather than simply publish –to ensure best outcome
 Connectivity – use online media by default

Comply or explain–particularly with sales to connected parties

Question 8

When must the SIP 16 statement be provided to creditors?

Answer 8

To be provided with 1st notification to creditors (proposals might be later):

 Within 7 calendar days of the transaction

 Required to explain any non-compliance

 Append to proposals filed at Companies House

Question 9

When does The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 [ARDCPR21] apply?

Answer 9

Substantial disposals made within the first 8 weeks of administration to a party connected to the company

 MAY OR MAY NOT ALSO BE A PRE-PACK
 NOT a pre-pack if sale not “shortly after”appointment (2 weeks?)
 NOT a pre -pack if not negotiated prior to appointment of administrator

Question 10

When isn’t a transaction a pre-pack?

Answer 10

 NOT a pre -pack if not negotiated prior to appointment of administrator

OR

 NOT a pre-pack if sale not completed “shortly after”appointment (2 weeks?)

Question 11

Reg 3 ARDCPR21 - what is a substantial disposal?

Answer 11

Means a disposal, hiring out or sale to one or more connected persons

 During the period of 8 weeks beginning with the day on which the company enters administration

 Of what is in the administrator’s opinion all or a substantial part of the company’s business or assets

 To include a transfer effected by a series of transactions

Question 12

Reg 3 ARDCPR21 - what are the restrictions on a substantial disposal?

Answer 12

The administrator must not make a substantial disposal unless either one of the following two conditions is met:

1. The approval of the company’s creditors for the making of that disposal has been obtained; or
2. A qualifying report in respect of the making of that disposal has been obtained

Question 13

Who is a connected person per sch B1 IA86?

Answer 13

 Director or other officer or shadow director of a company, non - employee associate of such person, non-employee associate of the company

 The company is connected with another if any relevant person of one is or has been a relevant person of the other

 A non -employee associate of a person means a person who is an associate otherwise than by virtue of employing or being employed by that person

Question 14

How is creditor approval obtained for the purpose of ARDCPR 21?

Answer 14

The approval of the creditors is obtained if administrator has:

 included proposals for making the disposal in their statement of the proposals under para 49

 And subsequently sought a decision from company’s creditors as to whether they approve the proposal and

 The company’s creditors approve the proposal:
 Without modification or
 With modification, consented to by the administrator

**Approval can be by deemed consent or qualifying decision procedure BUT NOT para 52 deemed approval

Deemed approval = where sufficient assets to pay creditors in full, or insufficient assets to pay unsecured creditors any more than the prescribed amount, or objectives a & b can’t be met. UNLESS 10% by value of creditors request a DMP.

Question 15

What is a qualifying report for the purpose of ARDCPR 21?

Answer 15

 A written report from an independent evaluator
 Obtained by the connected person
 Dated and authenticated by the evaluator
 Containing the prescribed contents
 Administrator is satisfied that the individual has sufficient knowledge and experience

Question 16

What must a qualifying report for the purpose of ARDCPR 21 contain?

Answer 16

The report must contain:
 Statement that the person giving the report is an Evaluator
 What their relevant knowledge and experience is
 Details re Professional Indemnity Insurance (PII)
 Identification of the relevant property
 Whether a previous report obtained or not
 Statement re nature of consideration to be paid and value in £
 Identification of connected person and statement re their connection to the company

Question 17

What must the Evaluator’s opinion state:

Answer 17

 The evaluator’s report must state either:

1. They are satisfied that the consideration for the property and grounds for disposal are “reasonable in the circumstances”
   (case made); or
2. They are not satisfied that such consideration is reasonable (case not made)

In either case, the evaluator’s principal reasons for making the statement and a summary of the evidence relied upon

Question 18

What is the timing for an evaluator’s report?

Answer 18

Before or after appointment of administrator

Question 19

What is the status of an evaluator’s report?

Answer 19

The administrator must consider the report, but is not bound by it

Can reject whether positive (eg better offer) or negative (ie accept if in best interests of creditors)

Question 20

What are the requirements to act as an evaluator?

Answer 20

The evaluator must be an individual who:

 Is satisfied that their relevant knowledge and experience is sufficient for the purposes of making a qualifying report

 Meets the requirement as to insurance

 Meets the requirement as to independence - not connected to the company or an associate, nor subject to other conflict of interest

 Is not excluded from acting as an evaluator ie Not an undischarged bankrupt or disqualified from acting as a director etc

Question 21

Who receives a copy of the evaluator’s report & when?

Answer 21

The administrator is required to send the qualifying report to creditors and the Registrar of Companies:

 Appended to their proposals

 Or earlier, with their SIP 16 report (if applicable)

 Together with:
 A statement of the reasons for proceeding with the substantial disposal if contrary to the opinion expressed in the report
 Any viability report instructed by the connected person

Question 22

What are the SIP 13 (disposal of assets to a connected party) key compliance standards?

Answer 22

 IP should exercise professional judgement in advising the client whether a formal valuation of any/all of assets is necessary

 If valuation relied on not undertaken by an appropriate independent valuer, this should be disclosed along with rationale

 Office holder should keep detailed records of reasoning behind decision to sell to connected party and all alternatives considered

Question 23

When must a SIP 13 transaction be disclosed?

Answer 23

ASARP -Disclosure in next report to creditors after transaction has been concluded

Question 24

What are the additional disclosure requirements where a company is in administration?

Answer 24

IP should ensure that any connected party purchaser is made aware of The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021
 i.e. the sale must be subject to a qualifying report or approved via the proposals, if conducted within 8 weeks of appointment

 Additionally where a qualifying report has been provided to an administrator, they are required to send the qualifying report to creditors with the proposals

Question 25

What powers do administrators have to sell a business?

Answer 25

 Administrator has the power to sell a business without prior approval from creditors, Court or committee

 Schedule1

 Any decision to sell is the administrator’s responsibility

Question 26

TUPE - if a business is sold whilst in administration, who is responsible for redundancy costs?

Answer 26

 Where a company is in administration at the time of the transfer of its business, its employees and their liabilities will always transfer automatically to the purchaser

 They will be responsible for any redundancy costs, if they chose to re-organise staff

 The purchaser will potentially have more time to consult with employees if
redundancies need to be made

Question 27

What are the s216 exceptions?

Answer 27

May act in 3 sets of circumstances:
1. Business purchased from an insolvency office holder
2. Ask Court for permission
3. Name already in use