Evaluators and Pre-Packs: What’s new?

Evaluator vs. Opinion provider:

In the first attempt at “making Pre-Packs more transparent” (the original objective back in 2015) under the voluntary scheme, all that was required was for the prospective purchaser to obtain an independent “opinion” that the pre-pack was (or was not) “reasonable in the circumstances”. There was no real attempt at qualifying who would be a suitable opinion provider, save for a recommendation that an independent body of experienced professionals be set up.

This led to the establishment of The Pre-Pack Pool – a collaborative approach by Recognised Professional Bodies (RPBs) (including the IPA), and trade creditors’ bodies such as BPF and CICM, to implement Government recommendations aimed at transparency and giving greater reassurance to creditors. A “pool” of opinion providers (in this case, Chartered Accountants, Chartered Directors, and former Insolvency Practitioners (IPs)) was appointed, to which potential connected party purchasers in pre-packs could refer.

So, what is new:

An opinion is defined as a view or judgement formed about something.

An evaluation, however, adds a further element in that it expands into the making of an assessment and judgement about the amount, number, or value of something (in this case the grounds and consideration for a pre-pack). An evaluator is a person who assesses the amount, extent, or value of something.

So, not a vast difference in the function, although in Evaluation / Evaluator, assessment and value are added to judgement as criteria. This is where I believe a new chapter has opened up in the Regulations and has re-defined the role of the independent provider of the report.

Finally, whilst the Pre-Pack Pool is still in operation, it is no longer the only provider of such reports.

Evaluator’s expanded role:

As mentioned above, the Evaluator role now forms a major part of the Regulations and Guidance. The positive requirements to be an Evaluator in both the Regulations and Guidance are still relatively brief, but added to the “self -certification” and independence is the requirement to hold Professional Indemnity Insurance.

This will no doubt be seen as a positive move, given that it will narrow the field of potential providers to those from the professions.

It could also be seen as a barrier to entry into the market, given the recent increases in premiums for PI cover in the insolvency market. (Some providers have hiked premiums by as much as 200% recently).

There is also a responsibility placed on the ultimate Administrator to be satisfied as to the suitability of an Evaluator to provide a report, so the role is not without some professional scrutiny.

Report requirements

The list of requirements in the Guidance that “may be needed” is 30 items long; those that “must be included” drops to 16. Again, this represents a major shift from the old “opinion” based regime. Space precludes a full list but of the latter 16 bullet points, 2 stand out:

1: “Where previous reports have been provided”, the Evaluator should illustrate “what steps have been taken to obtain them” or provide “a statement that no previous reports have been obtained” (a reaction to adverse comments about “opinion shopping”?). This will be something any prospective Evaluator will be wary of. If the applicant chooses not to disclose any previous reports, can the Evaluator be held liable if they subsequently appear, particularly if they were negative? If a prospective purchaser has shopped around to find a positive opinion/report but chooses not to advise the provider of any final report that there were previous negative opinions, then it seems that in those circumstances there would likely be no disclosure, and creditors would be none the wiser.

2: A more onerous requirement is to provide a detailed summary of the information relied upon in compiling the report and reasons to support the statement (judgement) given. This will involve more diligent research by the Evaluator and better information supply by the purchasing entity in my view.

Administrators’ involvement:

The Evaluator may ask for additional information, and if the recipient is unsure about this or does not have it, they are advised to approach the IP for it (some indication of more involvement of the IP here). Equally, the Evaluator is effectively encouraged to approach the IP directly if they feel that they may have the additional information they seek. This seems to be an acknowledgement of what often happened, if only informally, under the voluntary regime.

We at The Pool have already had positive contributions from Administrators where the information supplied by the recipient has been less than detailed. Having seen such co-operation work successfully, perhaps transparency will further improve as a result?

Report Outcomes

It is interesting that only two statements are now prescribed: that the grounds for the pre pack and the consideration to be provided are reasonable in the circumstances, or not. In the past, there were three options: a case made (or not made) for the transaction, and a “middle ground” where a positive view could be given but is “subject to limitations” (such as minor omissions of detail or perhaps a lack of a comprehensive statement of affairs).

Creditors

As a final reminder in the section about the Evaluator and the report, the Guidance states that The Evaluator should keep in mind that their report is intended to “give clarity to Creditors”, which is where we started when The Graham Report was commissioned. Trust and transparency were the key words in the Government’s lexicon back then (2013/14), and it is good to see that carried forward.

As ever though, the impact on Creditors will be hard to judge. Will they read the reports? What impact will the report have on their day-to-day lending/trading decisions? Creditor engagement, or lack thereof, has been a constant theme throughout any debate on insolvency processes & regulation. Although I am encouraged to hear that banks in particular are insisting on seeing independent reports in pre-pack situations.

Conclusions

It took over five years of the voluntary system for Government to decide that it “didn’t work”. With an average of less than 10% of eligible cases being independently reviewed, that much was obvious. Even then, the power to make referral mandatory was nearly lost as the “sunset clause” expired in May 2020. It was thanks to a debate in the House of Lords about the Corporate Insolvency and Governance Act that the power was resurrected.

As with any perceived “interference” with the regulation of insolvency practice, the Regulations have caused some passionate debate before it has even started, but with goodwill all round, I can see it making a difference in the perception of the “fait accompli” nature of connected party sales; “It’s not just Pre-Packs” either, as one prominent commentator warned!

This is an abridged and updated version of an article that first appeared in the June 2021 issue of Corporate Rescue & Insolvency.