Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Lord Callanan Excerpts

Monday 22nd March 2021 Lords Chamber

Moved by

[Lord Callanan]

That the draft Regulations laid before the House on 24 February be approved.

Relevant document: 48th Report from the Secondary Legislation Scrutiny Committee

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Callanan) (Con)]

My Lords, noble Lords may remember that the Corporate Insolvency and Governance Act 2020 revived a power to regulate connected sales in administration, which this statutory instrument uses. Now more than ever, we need a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike, particularly as we endeavour to rebuild the economy after the challenges it has suffered from the Covid-19 pandemic. The power enables us to strengthen the regime by imposing requirements where sales in administration are made to a connected person.

A pre-pack sale is where the sale of all or part of a company’s business is arranged prior to it entering administration. The sale is then completed by an insolvency practitioner appointed as an administrator. This usually occurs on the same day or immediately after the company enters administration. Pre-pack sales are a valuable part of the insolvency landscape, representing around a third of all administrations. They can be a useful tool to rescue businesses, save jobs and preserve value. However, creditors are often unaware of the sale until after it has been completed and this can cause concerns, particularly where the sale is to a connected person, such as a director or one of their family.

Previous criticism about whether pre-pack sales are always in the best interests of creditors led to a number of industry measures being introduced in 2015. The main aim of these measures was to increase the transparency of pre-pack sales. Key to this was the opportunity for a connected purchaser to seek an independent opinion from a new Pre Pack Pool, a group of experts able to provide an arm’s-length view on the reasonableness of the transaction. Additional measures included strengthening professional standards for pre-pack sales.

There has, however, been a very low uptake of the use of the Pre Pack Pool. Each year, since its introduction in 2015, no more than 22% of connected purchasers have sought independent scrutiny of the offer. A government review concluded that pre-pack sales remain a valuable tool for business rescue, but that industry measures had not gone far enough in restoring creditor confidence. Consequently, the Government announced in October last year that they would regulate to strengthen the legislative framework in this area, principally by requiring an independent scrutiny of pre-pack sales where the sale involves a connected person. Draft regulations were published in October 2020 to seek stakeholders’ views. I thank my noble friends Lord Hodgson of Astley Abbotts, Lady Altmann and Lady Neville-Rolfe, the noble Lords, Lord Vaux of Harrowden, Lord Mendelsohn and the noble Baroness, Lady Bowles of Berkhamsted, for their valuable contributions and useful discussions in developing the regulations further. The comments of noble Lords, along with those of other stakeholders, have been considered carefully and certain changes have been made to take account of the feedback received.

These regulations will mean that an administrator will be unable to make a substantial disposal of a company’s assets to a person connected with it without either the approval of creditors or an independent written opinion. The requirements will apply to a disposal made to a connected person during the first eight weeks of administration. The meaning of a “substantial disposal” is defined in the regulations and the meaning of “connected persons” is set out in primary legislation. To prevent the requirements being circumvented, the definition of a substantial disposal includes sales which are carried out through a number of transactions and/or where these are to different connected persons.

The definition covers not only what would ordinarily be considered pre-pack sales, but any disposal made to a connected person within the first eight weeks of administration. This is to prevent the requirements being circumvented. The independent report must be provided by an individual qualified to do so within the meaning of the regulations and that individual is referred to as an evaluator. The administrator must be satisfied that the evaluator has the relevant knowledge and experience to provide the report. Requirements are also imposed on the evaluator in respect of their independence.

Following comments from stakeholders, the regulations have been strengthened and now require an evaluator to hold professional indemnity insurance to carry out the role. In practice, the role of an evaluator is likely to be fulfilled by certain professionals such as accountants, surveyors, lawyers and insolvency practitioners, along with members of the current Pre Pack Pool who meet the requirements to be able to fulfil the role. Depending on the nature of the disposal, other individuals who meet the requirements may also be suitable to act as an evaluator. The report provided by the evaluator must include a statement that indicates whether or not they are satisfied that the sale is reasonable.

A key concern of stakeholders was the risk of shopping around for a favourable opinion since there is no limit on the number of reports a connected person can obtain. We believe that the circumstances where someone would do this will be limited due to the cost implications and likely delay to the sale. However, in response to these concerns, changes have been made to the regulations to ensure transparency where more than one report is obtained. The evaluator will be required to include within the report the details of all reports that the connected person has previously obtained. If the connected person refuses to disclose a previous report or the evaluator believes that they are seeking to conceal the existence of such a report, that must also be set out in the evaluator’s report. Once received, the administrator must consider the report, circulate it to all known creditors and file a copy at Companies House. If the evaluator’s report states that they are not satisfied that the sale is reasonable, an administrator can still proceed where they consider it is in the best interests of creditors. If that happens, they must provide a statement to creditors setting out their reasons for doing so.

In conclusion, this statutory instrument will provide greater scrutiny of sales where they are to a connected person and give assurance to creditors that such a sale is appropriate in the circumstances. I commend the draft regulations to the House.

--- Later in debate ---

[Lord Callanan (Con)]

I thank all noble Lords for their valuable contributions to this debate. Yet again the House has shown the great value of the experience in this area with some very valuable and well-thought-through contributions. I say to my noble friend Lord Hodgson that I had no say in the timings of the debate, but I know that the noble Baroness, Lady Bloomfield, has taken careful note of his comments and will reply to him directly about the timescales.

Pre-pack sales are of significant interest in our economy and this is reflected in many of the comments made today. They are a valuable rescue tool where a company in financial difficulties has underlying value and is potentially viable. This is particularly relevant in the current economic climate, with many businesses struggling with the impact of the pandemic. Having a range of rescue vehicles for viable businesses within the insolvency framework will aid the recovery of our economy.

The power under which these regulations are made would potentially have permitted regulations to be made banning pre-pack sales to connected persons completely. It was clear from the government review of the 2015 industry measures that stakeholders believe that the opportunity to pre-pack a business to a connected person should be preserved.

In some circumstances, the business only has value to those connected to the insolvent company and a pre-pack sale is the best way to preserve that value for the creditors. However, it was recognised that there needs to be a stronger regulatory framework to prevent the risk of abuse for creditors.



The Government consider that these regulations will provide the additional safeguard and transparency of independent scrutiny while still enabling the rescue of viable businesses through a pre-pack sale. Let me assure the noble Lord, Lord Mendelsohn, that, subject to parliamentary approval of this statutory instrument, the Government will monitor its implementation to see how the regulations operate in practice. We will also provide guidance to assist connected persons, evaluators and administrators to understand their responsibilities under these regulations. In addition, we are working with the industry to strengthen professional standards for pre-pack sales.

The legislative and non-legislative changes will be monitored together to see whether they meet the objective of improving transparency and creditors’ confidence. If there is evidence that problems persist or that new issues have arisen, the Government will consider whether further changes are needed, including whether pre-pack sales should be banned altogether. Likewise, if there is evidence that the regulations are impeding legitimate rescue attempts, we will consider whether further adjustments are needed. As the economy and businesses strive to recover from the impacts of Covid-19, it is important that we have flexibility within our insolvency and restructuring framework. This will allow companies in financial distress to find the right mechanism to best help their particular circumstances, while balancing the needs of those affected by the insolvency to ensure that they are treated fairly and have confidence in the process.

With the time I have remaining, let me deal with a number of the questions that were asked. The noble Lords, Lord Mendelsohn, the noble Baroness, Lady Bowles, and my noble friends Lord Hodgson and Lady Neville-Rolfe, all asked why we did not mandate opinions from Pre Pack Pool; indeed, many noble Lords have asked me about this separately. The reason this did not prove possible is that it is a private limited company, so there are wider legal implications—both under competition law and in the scope of the regulation-making power—for seeking to make a single private company a monopoly provider of authorisations to take certain steps under insolvency law.

The noble Lord, Lord Mendelsohn, asked why the regulations do not define what is meant by “substantial” and whether there will be guidance on this matter. Since what constitutes a substantial sale may be different in any given case, depending on the nature of the business, this has been left to the administrator’s judgment. “Substantial” is used elsewhere in insolvency legislation, so administrators are used to making this type of judgment in the normal course of their duties. However, examples will be provided in guidance as to what may constitute a substantial sale in a particular case to aid the administrator. Also, on using “significant” or “substantial” in the definition, “substantial” is used elsewhere in insolvency legislation, so insolvency practitioners are already familiar with the term. However, again, we will monitor the impact.

The noble Lord raised the issue of secured lenders. Some secured lenders will potentially be caught by the definition of “connected persons” where they are entitled to exercise more than one-third of the voting rights. As with all good provisions, we will of course keep this under review.

The noble Lord also asked why the regulations do not make the administrator responsible for obtaining a report at the connected party’s expense. As the vast majority of pre-pack sales are arranged prior to an administrator’s appointment, with the sale completed on day one, placing a requirement on the administrator to be responsible for obtaining the opinion would cause a delay to the sale, which would increase costs and potentially hinder the business rescue.

My noble friends Lady Neville-Rolfe and Lord Hodgson, and the noble Lord, Lord Mendelsohn, asked whether we intend to review these regulations when they are in force. As I said earlier, we intend to monitor the implementation of this SI and will consider modifying or supplementing its provisions in the future if it proves necessary to do so. We will work with the insolvency regulators, professional bodies and opinion providers that are implementing the regime to work out whether any changes are necessary.

A number of noble Lords—my noble friend Lady Neville-Rolfe and the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie—asked me about a list of approved providers or evaluators. The Government take the view that this would be an unnecessary administrative burden on government at a time when public resources and expenditure are under severe pressure. A person whose knowledge and experience are suitable in one context might be unsuitable in a different context. A list would not therefore remove the need to consider whether a person’s knowledge was sufficient on a case-by-case basis.

The qualification requirements for evaluators was raised by the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie. As I said earlier, the administrator will need to be satisfied that the evaluator has sufficient knowledge and experience to produce the report and meet the other requirements of the regulations. Guidance will be provided for administrators to help them meet those conditions. We recognised where there were stakeholder concerns about this issue and subsequently strengthened the regulations by including a requirement that the evaluator hold professional negligence insurance.

The noble Lord, Lord Vaux, asked about the requirement for further reports and a potential penalty. There would be difficulties in introducing new penalties via the regulations and we have aimed to take a proportionate approach. The noble Lord asked also why the restriction on providing previous professional advice is limited to 12 months. A three-year restriction might impact the number of available suitable individuals able to provide an opinion, so is too long a period. We consider that 12 months is appropriate.

The noble Lord, Lord Foulkes, the noble Baroness, Lady Bowles, and other noble Lords asked about timing. Assuming that Parliament approves these regulations, it will be possible to amend them post the prior primary power sunsetting, so, yes, we can come back to them in the future even if the original primary power has sunsetted.

The noble Lords, Lord Foulkes and Lord Lennie, asked why the regulations allow the administrator to proceed with a sale if the evaluator provides an unfavourable report. I dealt with this in my opening remarks. The regulations provide a specific role for the evaluator which is confined to the provision of the report and determination of whether the grounds and the consideration to be provided for the sale are reasonable. The administrator is an officer of the court and has a statutory duty to act in the best interests of creditors as a whole.

The issue of Scotland was raised, as usual, correctly and appropriately, by the noble Lord, Lord Foulkes —it allows me to make a comment also about the other devolved Administrations. All the devolved Administrations have been informed of the intention to regulate, and officials have kept closely in touch with devolved colleagues on the proposals. If these regulations are approved by Parliament, they will apply in England, Scotland and Wales. An equivalent power to regulate connected persons sales in administration for Northern Ireland was created by the Corporate Insolvency and Governance Act 2020.

The noble Lord, Lord Mann, raised Football Index and Exeter City Football Club. We recognise the serious concerns of Football Index customers about these developments and the worry that will have been caused. I understand that the Gambling Commission has been investigating this company for some time and has suspended the operator’s licence while it continues. The Secretary of State for Culture and the Minister for Media and Data have met the Gambling Commission twice in the past fortnight to discuss this issue and have requested and received urgent updates. The noble Lord will understand that I cannot comment on an ongoing investigation, beyond saying that we are closely monitoring the situation.

The noble Lord, Lord Lennie, asked about banning pre-pack sales. I dealt with that earlier; it is possible we might come back to this in future if it proves not to be working. The noble Lords, Lord Vaux and Lord Lennie, raised the issues of the evaluator being a regulated professional and of how creditors can be assured that the report has been produced by someone with suitable skills. The regulations require that the individual providing the report should have professional indemnity insurance cover, as I said earlier.

I think I am out of time; I apologise to noble Lords whose questions I have not answered. If necessary, I will come back to them in writing. In conclusion, I believe that, by strengthening the legislative framework for sales to connected persons in administration, these draft regulations meet the challenge set for us. I therefore commend them to the House.

Motion agreed.