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

Lord Mendelsohn Excerpts

Monday 22nd March 2021 Lords Chamber

[Lord Mendelsohn (Lab) [V]]

My Lords, I thank the Minister for his introduction of these measures. We are all very grateful for the efforts undertaken by the Insolvency Service and the Minister to deal with this issue, and for our interaction. I hope that he will take my comments and those of others constructively.

We share the view that pre-packs play a useful role, but the core issue is how to deal with abuses. At its simplest, we are most grateful to the Minister for the assurance that we will now be looking at this as a mandatory procedure. This has been the critical change which now provides the opportunity to cleanse the process of pre-pack administrations. We could have achieved the same objective with the Pre Pack Pool—I am not compelled by the issues that were outside it—but that has passed and we now must deal with the realities of the arrangements that have been suggested, particularly how effective they are.

I worry about the effectiveness of these regulations. We are not in the same situation as that with the monitors. I have tried for one business to get a monitor, using the existing legislation, and it is quite a difficult process. The compulsion of making this mandatory will certainly create a different incentive, which is important. However, some of the changes made after the consultation are currently insufficient to make this work as effectively as possible or to deal with all the potential abuses. I would be grateful for the Minister’s thoughts on these issues. It is important to acknowledge that the ability of a connected person to opinion-shop has been curtailed from the original proposals, but the Minister is yet to address the issues whereby someone gets something which is not a full opinion. It is advice, it is guidance, it is other things which contribute to making a pre-pack to a connected party that may be problematic, without informally becoming a full opinion. Such things are still excluded. It would be very useful if they were carried within the ambit of this to ensure that opinion-shopping was fully transparent and that those things which were not meeting the full test of an opinion were also included.

Many have concerns about the qualification requirements for the evaluator, but the Minister clearly specified the types of professions that this will extend to, not least because of the qualification that they must get professional indemnity insurance. This is probably a sensible approach. However, the Government were wrong not to look for a wider inclusion of secure lenders within the definition of connected persons. It is important to connect not only those who have voting rights but those outside that, who can exercise control without voting just by the very conditions. It is very important to ensure that this extends as strongly as possible. My first experience of how someone gamed a system irresponsibly was seeing how they used offshore-based debt vehicles to control a connected-party sale. That could continue, even under these requirements.

I feel very strongly that the responsibility for obtaining the opinion should be with the administrator, rather than the connected person. The arguments of cost, delay and the value of the connected person’s information are all reasons why abuse is plausible and possible, and with the modern world of the digital economy, and the way business is conducted, some of the issues to get to creditors can be dealt with much more quickly. Therefore, that balance should be turned in favour of the administrator. It would help to cleanse the system very significantly.

Finally, the further definition of “substantial disposal” again does not fully cover what is necessary. The use of “significant” or “material” would be very easy, but “substantial” has a specific legal definition of size, which allows for arguments about proportionality. Again, you can parcel up a company as well. Given that this is a statutory instrument, can the Minister indicate what the review would do to ensure that this works as effectively as possible, and what further consideration might be given in the fullness of time to whether these measures can be tightened in the light of potential experience, or who will be responsible for ensuring that this has an effective regime to monitor and, if necessary, proposing some form of sanctions?