Independent Evaluator Reports for Connected-Party Pre-Pack Transactions

The regulations restrict when an administrator can make a disposal of a company’s business or assets to a connected person.

An administrator must not make a substantial disposal to a connected person within the first 8 weeks of administration unless they either:

• obtain approval of the transaction from creditors; or
• have received and considered a report obtained by the connected person from an evaluator on the reasonableness of the proposed disposal.

A connected person is either an individual or a company that is connected to the company entering administration. All references in this guidance to a connected person should be read in this way. Below is a list of those who would fall within the definition of a connected person.

This list is not exhaustive and you may need independent legal advice if there is any doubt about whether a person’s relationship to the company makes them a connected person.

A connected person could be:

• director of the company
• secretary of the company
• spouse, ex-spouse, child or sibling of a director or any other officer of the company
• business partner of a director of the company
• a company that is controlled by any of the above listed individuals
• any person or company who has control over the company, including shareholders with a third or more voting rights. This could include secured lenders

It is the responsibility of the insolvency practitioner to establish if a party is connected to the company.

A substantial disposal is a disposal, hiring out or sale by the administrator of the company’s assets (including one given effect by a series of transactions) if it:

• takes place within the first 8 weeks of administration
• involves one or more connected persons
• disposes of all or a substantial part of the company’s business or assets

A disposal includes a situation where a connected person holding security over the company’s assets purchases the business or assets to reduce their level of debt in the administration.

It is the responsibility of the insolvency practitioner to establish whether a disposal is substantial and whether it falls within scope of the regulations.

Establishing whether a disposal is substantial should include but is not limited to considering:

• the value of either the business, assets or both involved in the disposal
• how much of the business is being disposed of
• whether the trading style and good will of the business forms part of the disposal

The connected person is responsible for obtaining the report.

Where there are multiple connected persons involved in the same substantial disposal only one report is required.

Where there are multiple transactions that make up a substantial disposal there must be one report that covers all the transactions. Where there is more than one disposal and each disposal is substantial, each disposal will require a separate report. These situations may happen where different connected persons are proposing to buy different assets or parts of the business.

Where there are competing offers for a disposal from different connected persons, each connected person will need a report for their proposed disposal.

It should be the connected person with the greatest knowledge about the company and the proposed disposal who should instruct the evaluator. This will help to ensure that the evaluator gets all the information they require.

For example, where a director of the company is a party to a proposed disposal involving other connected persons then the director would be the best placed to instruct the evaluator. Out of all the connected persons it is the director who is most likely to have greatest knowledge about the company.

A report that meets the requirements set out in the regulations (a qualifying report) must be received and considered by the administrator before they can complete a substantial disposal within the first 8 weeks of administration.

Any connected disposal made by the administrator after 8 weeks is not in scope of the regulations but remains within scope of the insolvency rules and regulations for disposals in administration. Further information about what is required for a qualifying report.

An administrator does not have to be appointed at the time the report is obtained. For example, a pre-pack sale in administration is where the sale is arranged prior to a company entering administration and completed on or very shortly after the appointment of the administrator. In those circumstances, the report should be obtained before the company enters administration so that the sale can be finalised as soon as possible by the appointed administrator.

It is important that all parties involved in the process act in a timely manner. Delays may increase costs and could jeopardise the proposed substantial disposal.

The connected person is responsible for obtaining the report. They must instruct an evaluator, and should provide them with the information required to complete their report, including any previous reports.

The connected person is responsible for providing information to an evaluator to complete their report. They should expect to be asked for information about the company entering administration, the recipient of the assets and the substantial disposal.