Pre-pack numbers soar but concerns remain over new connected-party process
27 August 2024
The number of pre-packs has increased dramatically since the introduction of new regulations in 2021 the latest data shows, but purchasers' ability to choose their own evaluator may be leading to 'over-familiarity', according to one pre-pack veteran.
The lack of a definition of the qualifications for evaluators has also been raised as a concern.
Since the introduction of the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, the number of pre-packs has risen 171% from 201 in 2021 to 545 in 2023, according to figures by the Insolvency Service.
The data, which is based on recorded SIP16 statements, also shows the number of connected party sales has more than tripled over the same period, from 106 in 2021 to 329 in 2023.
There was only one case in 2023 where the independent evaluator’s opinion on the “reasonableness of grounds and consideration of transaction” was not satisfied.
Stuart Hopewell, director of Pre Pack Pool, an independent evaluator for connected party sales said: “If you think in terms of fashions and trends, at one time CVAs were in, then pre-packs were in, then pre-packs were going to be scrutinized more, which meant they dropped away. But [in] 2022 and 2023, pre-packs came back with a vengeance. They seem to be seen as more acceptable [and,] because the IP community were prepared to work with and share with the evaluator, they became easier to get through.”
The regulations, which require the approval of creditors or an independent evaluator if a sale is to go ahead within the first eight weeks of administration, were introduced to provide stricter scrutiny over pre-pack administration sales to connected parties.
Under a pre-pack, a business’s assets are sold to either an unconnected third-party or a ‘connected-party’ such as a new vehicle created by the former directors or shareholders of the insolvent company, or a connected company. Unsecured creditors often find out about the sale after it has been agreed, which can lead to bad press for the procedure.
A long-standing critic of pre-packs is Peter Walton, professor of insolvency law at Wolverhampton University. Among his concerns is the relationship between connected parties and evaluators.
Writing in the Autumn 2024 edition of R3’s Recovery magazine, he said: “The ability for those engaged in a connected party pre pack to choose their own evaluator may be leading to a degree of over familiarity with the same guns for hire being approached.”
Evaluators themselves have also raised a concern about the new regulations not requiring an evaluator to have any specific qualifications or experience in order to practise.
Kevin Murphy, director at Compass Evaluator Reports, spoke to Recovery magazine's Autumn 2024 edition for an evaluator Q&A. He said: “The lack of definition of the qualifications to be an evaluator is a controversial aspect of the regulations, especially when you consider that the evaluator is effectively being asked to assess the work of highly regulated, highly qualified insolvency practitioners.”
He added: “I think that anyone who acts as an evaluator requires adequate skills to be able to understand and evaluate the nature of the information they are provided. An evaluator also ought to be someone who can assess whether they have been presented with the appropriate information and will ensure that they obtain it if that is not the case.”
Julie Palmer, regional managing partner at Begbies Traynor Group, said that the evaluators are more than just a rubber-stamping process and provide a welcome degree of independence to the process.
She added that the UK’s current lending framework may have affected creditor perception of pre-packs: “The change to preferential status means that lenders don’t sit as high on the floating priority list as they once did and may feel they are receiving a lower return, despite the [pre-pack] process often offering better value than an alternative insolvency process.”
Palmer said that it is now very difficult to keep a business running through administration, but pre-packs offer one of the few ways to maintain value for creditors.
“Once a formal appointment happens and the world is aware of it, there are a number of factors that come into play. Suppliers and customers often won’t contract, funding becomes squeezed or unavailable, employees move on in an era of skills shortages and any environmental issues need careful attention. A pre-pack can achieve a seamless transfer and best value often comes from those that know the business and know how to fix the problems within it.
“IPs should be asking themselves whether we as a profession are doing enough to promote the obvious benefits of pre-packs as a business rescue tool given the hard work that goes into achieving these rescues and the jobs and businesses that are saved.”
For more on pre-packs see the Autumn 2024 issue of Recovery magazine, arriving with members in September.
