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

Lord Vaux of Harrowden Excerpts

Monday 22nd March 2021 Lords Chamber

[Lord Vaux of Harrowden (CB) [V]]

My Lords, it is a great pleasure to follow the noble Baroness, Lady Neville-Rolfe. It was her amendment to the Corporate Insolvency and Governance Bill that allowed these welcome regulations to be tabled. During the debates on the Bill, I expressed some doubts that the Government would address the concern around connected party pre-packs, so I am delighted to be proved wrong and that the Government listened to the concerns that were raised. I am very grateful to the Minister for the time he has made available to discuss the regulations and to Paul Bannister and his team at the Insolvency Service; they have been very generous with their time and very helpful and open in their approach.

These regulations are very welcome and should help to improve the transparency around pre-pack disposals to connected persons. That said, a number of concerns remain. There are three matters that I want to raise, a couple of which have already been referred by the noble Lord, Lord Mendelsohn. First, the regulations do not prescribe any formal qualifications to become an evaluator. An evaluator has only to satisfy themselves and the administrator that they have sufficient relevant knowledge and experience, and must have professional indemnity insurance. I understand the reasons for this approach, which was, in part, to allow members of the pre-pack pool to continue to act as evaluators. The Government may have found an appropriate balance here, but I urge the Minister to keep this under review and to take action to strengthen the qualification requirements if it appears that underqualified people are taking advantage of the rather vague rule.

Secondly, there is opinion shopping, to which the Minister referred. This is when a connected person seeks reports from more than one evaluator but makes only the most favourable report available to the administrator. As the Minister said, the regulations have tried to address this risk by requiring that if the evaluator becomes aware that the connected person has obtained a previous report or comes to believe that the connected person may have obtained a previous report, they must include details of that report or if they have not been given it they must explain why and what steps they took to obtain it. However, the onus lies with the evaluator to find any previous report. If the connected person is not open about it, there is little the evaluator can do.

What is missing is an obligation on the connected person to provide any previous reports to the administrator or to state that they have not sought or obtained any such report. As the noble Lord, Lord Mendelsohn, pointed out, “sought” is important. It is easy to imagine a situation where a previous evaluator tells the connected person that they will not be able to state that the disposal is reasonable and is then asked by the connected person not to issue the formal report. The connected person can then honestly say that they have not had a previous report. The opinion-shopping problem still remains. It would have been better if the administrator was responsible for appointing the evaluator, at the cost of the connected person. That way, it would not be possible for the connected person to shop around for the most favourable opinion. However, we cannot amend that now, so I again urge the Minister to keep this under close review and to take action quickly should concerns about abuse arise in this area.

My last concern relates to the independence requirements for the evaluator and specifically the restriction set out in Regulation 12(1)(d) around providing advice to

“the company or a connected person.”

A person is considered not to be independent if they have provided advice on insolvency or corporate restructuring matters only, and only during the last 12 months. As a comparison, to be considered an independent non-executive director under the corporate governance code a person cannot have had any material business relationship with the company, direct or indirect, within the past three years. I would be grateful if the Minister could explain why such limited restrictions are felt appropriate for an evaluator to be considered independent under Regulation 12(1)(d).

Finally, to aid my own understanding and, I hope, to be helpful to others, I ask the Minister to clarify one point. As I understand it, the time period for making these regulations expires at the end of June. If changes to them turn out to be required after that date, following a review of the matters already discussed, can they be made by further regulation or would primary legislation be needed?