Welcome to our latest edition of Insolvency Bitesize. 

Now that the industry has begun to digest the reforms introduced in early summer by the Corporate Insolvency and Governance Act 2020 - covered in our first item in this edition - the Government has released its long-awaited review of pre-packs. 

The draft regulations published alongside the report indicate that mandatory independent scrutiny will be required before the administrator can proceed with a business sale to a connected buyer within the first eight weeks of the administration. Either the approval of creditors must be sought and given or the connected buyer will need to provide an independent written opinion by an “evaluator”. These changes will be accompanied by guidance and a strengthening of SIP16.

The mood music around pre-packs is clear and the insolvency industry as a whole will need to get behind these changes to make them work and ensure that a valuable business rescue tool remains part of the toolkit. There are, however, 3 key points worth highlighting which we will all need to think about as the draft regulations develop: 

  • Qualifications of the evaluator: the draft Regulations lack clarity on who might be expected to take on this role. They will need to be independent and not otherwise conflicted or excluded. But as regards their qualifications for taking on the role, the draft regulations simply provide that it is sufficient “if the individual believes that they have the requisite knowledge and experience to provide the report”. This lacks clarity, is open to abuse and risks undermining the goal of transparency underpinning the Government’s policy. To proceed with a sale, the draft regulations provide that the administrator will need to be satisfied that they have no reason to believe that the evaluator did not meet the qualification requirements. Is an administrator expected to question the individual evaluator’s belief or their substantive knowledge and experience? In many cases, of course, it may well be obvious if the evaluator is sufficiently experienced. In others, should the administrator be expected to ask for further information? Further work is needed here.

 

  • Valuations: unlike the existing Pre-Pack Pool opinion, the evaluator’s report must state that the consideration is “reasonable” in the circumstances (as well as the grounds for the sale). Presumably, that will need to be backed by a valuation assessment if it is to carry any weight. Could this be based off the administrator’s own valuation exercise or the company’s own efforts? The connected buyer test goes beyond acquisitions by the former management. How will a connected buyer without access to key company information and more detailed knowledge of the business provide the evaluator with sufficient evidence to support its conclusion that the consideration is reasonable?
  • Role of the court: the court is not given any special power under the draft regulations to sanction a sale to a connected buyer. Yet, the approval of the court is one of the options in Paragraph 60A of Schedule B1 which confers the power to make the draft regulations. It would be useful for the court to be given an express power in the final regulations to allow an administrator to proceed with an in-scope sale to a connected buyer in the absence of creditor approval or an evaluator’s opinion. In cases of urgency or where a sale involves highly sensitive information, a viable connected buyer may not be prepared to wait to seek the approval of creditors or disclose information to an evaluator. Clarity on the extent of the court’s power in these circumstances would be preferable.

Beyond pre-packs and CIGA, what else does this edition contain?

One constant in recent years has been the use of landlord-focussed CVAs. We’ve had a look through recent CVAs and have identified a few market trends. wWe also highlight a potentially significant case on personal liability exclusions and what it might mean for CVA drafting more generally.

The remainder of this edition covers a broad range of issues – HMRC’s preferential creditor status, a court warning on pre-packs, more administration appointment issues and a decision neatly summarising the duties of a receiver on enforcement.

There’s clearly a lot going on at the moment. If you would like to discuss any of these developments – or others – in greater detail, please do get in touch.

October 2020 edition

CIGA reforms

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Ipso facto restrictions

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CVAs – not quite contracts?

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CVAs – what’s market?

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No rubber stamp for pre-packs

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Navigating the appointment minefield

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Corporate insolvency waterfall changes

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Duties of receivers on sale

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