What are pre-pack administration sales?
Pre-pack administration sales, more commonly known as “Pre-Packs” within the legal industry are a type of insolvency procedure used in the United Kingdom.
Pre-Pack sales involve the sale of a company's business and assets, and are generally arranged before the company enters into administration. The sale is then executed immediately or shortly after the appointment of administrators. However, before a sale to a connected party can proceed, an independent evaluator's report must be obtained.
What is an Evaluators’ Report?
An evaluators’ report assesses whether a pre-pack sale is reasonable and in the best interests of creditors. The intent of the report is to provide an objective assessment of the proposed sale of the company's business and assets before the company enters into administration.
This evaluator’s report is part of the regulatory framework designed to ensure transparency and fairness in pre-pack sales, particularly when it is to a connected party, such as existing management or directors.
The core element of an evaluator’s report is to ensure the proposed pre-pack sale complies with the requirements of regulation 7(h) (and of (i)) of The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 (the “Regulations 2021”): that either "the evaluator is satisfied that the consideration... is reasonable in the circumstances or, the evaluator is not satisfied...".
The circumstances reviewed by an evaluator for the production of the report, as appropriate and without limitation to, are: the market value of the relevant property in the proposed substantial disposal, the valuation and marketing processes, payment terms, the effects on creditors, employees and the taxpayer (HMRC and the RPS), professional costs and occasionally further matters such as competition or regulatory concerns.
As solicitors, we focus our advise on the relevant facts and the law. The purpose of the Regulations 2021 is to bring additional oversight to mitigate risk, or the perception of risk, in very specific circumstances - and to some extent the evidence may be that this tier of independent review has been helpful in achieving that and providing more information to creditors.
Why are Evaluators’ Reports important?
Evaluator reports are crucial in the context of pre-pack sales, most acutely, when the sale involves a connected party. Their importance stems from the following key factors:
- Ensuring Fairness: Evaluator reports provide an independent assessment of the proposed sale, ensuring that the transaction is fair and reasonable.
- Protecting Creditors' Interests: The report helps protect the interests of creditors by evaluating whether the sale price reflects the true market value of the business and assets, ensuring they receive a fair return.
- Enhancing Transparency: By providing a detailed analysis of the sale, evaluator reports increase transparency in the pre-pack process, building trust among creditors and other stakeholders, and preventing scepticism of the motives behind a connected party sale.
- Regulatory Compliance: The requirement for an evaluator's report is part of the regulatory framework designed to oversee pre-pack sales. Compliance with this requirement ensures that the sale process adheres to legal standards and best practices.
- Facilitating Informed Decision-Making: The report provides insolvency practitioners and stakeholders with the information needed to make informed decisions about the sale, including: an assessment of the sale terms, the rationale for the transaction, and its potential impact on creditors.
It is arguable that there could be concerns over an evaluator's work where the administrator has been able to use the evaluation to negotiate improved terms from the purchaser. The concerns about an evaluator’s work in those circumstances could be over their independence under regulation12(3); whether the evaluator is working outside the proper terms of their engagement under regulation 6(1) (potentially even the misuse of any confidential information), and - if any such concerns are made out - the effects on their insurance under regulation 11(2).
These concerns highlight the need for robust regulatory frameworks and practices to ensure that evaluator reports effectively contribute to fair and transparent pre-pack sales.
How can Maddox Legal help?
Mark Parkhouse has been working with IPs on an insolvency basis for 35 years and has subsequently produced evaluator reports in a number of disposals to a connected party. This blog is an extension of his LinkedIn post that may be seen here.
Please contact Mark or any of the Maddox Team about evaluator reports or other insolvency issues.