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Mandatory independent scrutiny for pre-pack sales to connected parties

On 8 October, the Government announced, following a review, that pre pack sales to connected parties are to face mandatory independent scrutiny.

Earlier this year and on behalf of our members, the IPA wrote to Lord Callanan, Minister for Climate Change and Corporate Responsibility, who led the review.

We recommended to Lord Callanan that the Government introduced regulations on connected party pre-pack deals in administrations, before the power which it had under the Small Business, Enterprise and Employment Act 2015 expired in May 2020. That power was reinstated in the Corporate Insolvency and Governance Act 2020, and we are pleased to note that corresponding action to our recommendation has been taken.

You can read about the planned measures here. To summarise them:

  • The report states that connected party sales will need to have an independent opinion provided by an ‘evaluator’, or via creditor approval if the sale is to occur within eight weeks of the date of administration;
  • If there is an adverse opinion, the administrator can still sell the company but must provide justification in a written report;
  • No specific qualifications to be an evaluator are required (it is stated in the provisional regulations that “an individual meets the requirements as to qualification if the individual believes that they have the requisite knowledge and experience to provide the report.”); and
  • It is not proposed that the regulations should specify that an opinion must be obtained from the Pre Pack Pool.

The proposals are a welcome move to address the perceived concerns about pre-pack sales to connected parties. We recognise that such sales are a valuable option for Insolvency Practitioners to try to save jobs and the viable parts of businesses and so support the Government in avoiding the superficially easy option of banning such sales altogether. In many instances, sales to connected parties are likely to offer a greater return to creditors than the alternatives, but stakeholders do need some assurance that this is the case.

We do have some concerns over the absence of a requirement for the new independent opinion provider, the ‘evaluator’, to have particular qualifications or to be subject to any form of regulation, such as membership of a professional body. 

We understand that the proposals do not restrict the provision of the independent opinion to members of the Pre-Pack Pool (PPP). We believe that the PPP, as the insolvency profession’s initiative in response to the Graham Report, is tried and tested and should have a role to play in enforcing the new regulations.

We understand that the measures will be laid before Parliament as soon as time allows and may be subject to change. Responses to these plans are welcomed from our members. If you would like to provide feedback, for us to submit on your behalf, please send your responses to [email protected] by 30 October 2020.