Draft pre-pack rules set out role of evaluator

The government has issued draft pre-pack legislation in a bid to improve stakeholder confidence in pre-pack administrations with the creation of new requirement for an evaluator

The purpose of the new regulations is to regulate connected person pre-pack sales with the aim of balancing the rights of creditors affected by business failure with the need to promote viable business rescue options to businesses, especially in the current economic climate.

A pre-pack is an arrangement to sell part or all of a company's business or assets that is negotiated and agreed before the company enters into administration but is completed when or shortly after the administration commences.

One of the main elements of the draft statutory instrument includes the provision for a new role of evaluator, an individual who will be charged with providing an independent opinion on whether the connected party pre-pack sale is fair and appropriate.

The provider of the opinion must be independent of the connected party purchaser, the company and the administrator and must meet certain eligibility requirements.

Colin Haig, president of insolvency and restructuring trade body R3 and head of restructuring at Azets, said: ‘While the amended regulations published [24 February] are an improvement on the initial legislation released in October last year, there’s still some way to go if these reforms are going to improve stakeholder confidence in pre-pack administrations.

‘In particular, there is no framework in place to ensure qualifying criteria for the evaluator position are being met. The new requirement for an evaluator to have professional indemnity insurance – which we proposed as a minimum requirement – will not be enough on its own to secure the confidence of the wider business community.

‘The role of the evaluator is being introduced to give stakeholders greater confidence that connected party pre-packs are legitimate. Not only does an evaluator need to be “above board”, but they need to have relevant business experience to give an opinion on whether a case has been made for individual connected party pre-pack sales.’

There are concerns that the evaluator may not have the relevant experience to perform the role.

Under the legislation published today, the new requirement is for an evaluator to have professional indemnity insurance, which would suggest the person doing it is at least involved in advising clients and handling sensitive information on a serious and legitimate basis.

R3 would have liked to have seen a lot stricter criteria and said that the government should maintain a list of approved evaluators.

‘While we appreciate this would have created a logistical issue for the government, it would also have helped to boost stakeholder confidence in the regulatory framework around pre-packs as the government would be able to ensure that only those with the relevant experience could carry out the evaluator role,’ Haig said.

‘We recognise the difficulties the government faces in legislating for this, but the responsibility for ensuring the suitability of the evaluator position shouldn’t simply be outsourced to the market to deal with.

‘The entire point of the reforms is to ensure that there is an independent “third pair of eyes” reviewing these sales – as it stands the legislation doesn’t do enough to set the appropriate framework to guarantee that the evaluator will fulfil that role in each instance.

‘One potential solution is for the government to maintain a list of approved evaluators. This may pose more of a burden for the Government, but it’s the only way to ensure that evaluators are suitably qualified, and have the relevant experience, to carry out the role.’

Statutory instrument, The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Sara White |Editor, Accountancy Daily, published by Croner-i

Sara White is editor of Accountancy Daily, published by Croner-i, and in...

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