Who is a Pre-Pack Evaluator? What do they do? And why do I need one?
The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021:
These new regulations were introduced on 1st May 2021 to outline a set of minimum standards that Administrators must adhere to when selling business assets to a connected party – commonly known as a Pre-Pack Sale.
One of those mandatory standards is to obtain a report and recommendation from an independent Evaluator.
This Evaluator has to hold the relevant knowledge and experience to decide if the terms of the connected party/Pre-Pack sale is fair and reasonable. Crucially, they also need to have professional indemnity insurance, which surprisingly wasn’t in the original draft of the regulations.
Some businesses facing administration deserve to be rescued.
I have said it before, and I will say it again: nobody goes into business intending to fail. Unfortunately, some businesses, no matter how hard a person may try, will go into some form of insolvency Administration or Liquidation. Despite the considerable effort they put into the company or the money they spent trying to rectify the situation. Sometimes the foundations and planning were just not solid enough to grow a sustainable business. However, through an Administration and a connected party/Pre-Pack Sale, business owners facing insolvency are thrown an '11th-hour' lifeline', with the potential to save jobs, save money and in turn keep the economy ticking.
Pre-packs are a helpful tool to quickly save jobs and keep some continuity of a failing business. But what is a Pre-Pack Sale? How does it work, and what are the negative effects of going down this path?
What is a Pre-Pack Sale
A Pre-Pack Sale (also known as Pre-Pack Administration) is a planned insolvency process where a business arranges to sell assets to a connected party before or within 8 weeks of placing the Company into Administration.
Confused? Let me break it down...
Imagine the following timeline:
A company can't continue to trade in its current form.
A plan is drawn up to sell all or a substantial part of the business assets, not the Company, to a connected party that can fund the sale and form a new company.
An Administrator is appointed to facilitate the sale.
The old company is put into Administration, let's say at 5 pm Friday.
5.01 pm Friday, the business assets are sold to the connected party. 90% of the time, this is the same Owners.
By Monday, the business is operating under a new company, hopefully maintaining its staff loyalty and customer confidence.
As you can probably expect, there has been a lot of criticism about the process. Unfortunately, the Pre-Pack procedure can be abused, offering businesses no reason to fight against insolvency as they know they will have the opportunity to simply "try again next week".
But for every company that uses a Pre-Pack sale to avoid paying creditors, there are a dozen more that have fought to save their company. These businesses want to keep trading and don't want to make staff redundant, but for whatever reason have fallen on hard times.
But now things are changing...
Among others who are critical of the Pre-Pack procedure, so too are the British Government. Hence, they have pushed through the new regulations to try to bring some order to the current situation 'in their eyes' and to restore the publics faith in this useful tool.
For a Pre-Pack Sale to happen after the 1st May 2021, the connected party purchaser must get an independent party (called an Evaluator) to review the transaction. The Evaluator will give his or her opinion whether there is a case for or against the Pre-Pack sale going ahead.
Let's put this into context as an example of what this looked like before the 1st May;
Something has happened, and your business is going bust. You can't get out of it. Still, you want to salvage what you can of all those years of hard work. You want to purchase the customer database so that you have customers you can keep trading too.
In this example, the Insolvency Practitioner arranges to sell you the customer database asset, puts your company into administration and then:
you repurchase the database from the Insolvency Practitioner for X amount (must be done within 8 weeks)
you set up another company in a new name with you still running it
the creditors learn of the pre-pack sale after completion
The change from 1st May means that before the Pre-Pack sale, in this example, the customer database purchase can go ahead; you have to go to the independent Evaluator and tell them you are buying back the database from the Administrator. The Evaluator will review the Pre-Pack sale based on all the facts presented to them and give their opinion for or against the sale.
The only catch... even if the Evaluators recommendation is against the pre-pack sale, the Administrator is still legally allowed to go ahead with the sale anyway.
So what has actually been introduced since 1st May?
A company going into Administration (this does not apply to any other form of insolvency), considering a pre-pack sale, will have to employ the services of an independent evaluator to comply with the regulations —an additional layer of cost to the insolvency process.
The advice being sought from the Evaluator doesn't have to be followed. Still, it does have to be circulated to creditors and filed at Companies House. This raises whether the Government has answered their initial concern with this new regulation or have just made this insolvency rescue process even more costly and complex.
How can I help...
As an experienced Business Consultant with a previous career spanning 25 years as an Insolvency Practitioner, I am the perfect candidate to be brought into a Pre-Pack Sale as the Evaluator.
It is a concern that just about anyone can be an Evaluator if they think they have the knowledge and have professional indemnity insurance. However, due to my background, I am trusted by Insolvency Practitioners to understand the insolvency law and grasp the situation from each parties point of view. I have obtained professional indemnity insurance specifically for this role.
My past experience can help shape recommendations, provide insights, and help the process run as smoothly as possible in the interests of all stakeholders concerned.
To summarise...
The thought of insolvency can be a huge nightmare for many business owners who believe they have no options left.
A Pre-Pack sale to save even just part of the business and jobs is a lifeline.
If I've been brought in to help a failing business before it's got this far, we've even managed to restructure the business before appointing Administrators. Salvaging profitable parts of the business and using restructuring tools for the areas of the company causing the problems without the costs of a Pre-Pack.
But whether restructuring is an option, a Pre-Pack sale is the answer, or Insolvency is the right thing to do. The ideal situation is to pick up the phone before you get to this stage and let me help you as soon as you can.
I've always provided honest, non-bias and experienced recommendations.
And I will always continue to do so.
If you are a business owner worried about the future of your company or an Insolvency Practitioner looking for a reliable Evaluator to work with. Pick up the phone. Let’s have a chat and see how I can help you.
Note: Any Evaluator must have their own Professional Indemnity Insurance (covering themselves for any advice given), which I possess.
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