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

Debated on Tuesday 23 March 2021

The Committee consisted of the following Members:

Chair: †Hannah Bardell

Andrew, Stuart (Treasurer of Her Majesty's Household)

Brennan, Kevin (Cardiff West) (Lab)

Caulfield, Maria (Lewes) (Con)

Davies, David T. C. (Parliamentary Under-Secretary of State for Wales)

Gideon, Jo (Stoke-on-Trent Central) (Con)

Jones, Mr Marcus (Vice-Chamberlain of Her Majesty's Household)

† Mann, Scott (North Cornwall) (Con)

Morris, James (Lord Commissioner of Her Majesty's Treasury)

Osamor, Kate (Edmonton) (Lab/Co-op)

† Powell, Lucy (Manchester Central) (Lab/Co-op)

Rees, Christina (Neath) (Lab/Co-op)

† Rutley, David (Lord Commissioner of Her Majesty's Treasury)

† Scully, Paul (Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy)

Sharma, Mr Virendra (Ealing, Southall) (Lab)

Simmonds, David (Ruislip, Northwood and Pinner) (Con)

† Smith, Jeff (Manchester, Withington) (Lab)

Thomson, Richard (Gordon) (SNP)

Jack Dent, Committee Clerk

† attended the Committee

First Delegated Legislation Committee

Tuesday 23 March 2021

[Hannah Bardell in the Chair]

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

I beg to move,

That this House has considered the draft Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021.

It is a pleasure to serve under your chairmanship, Ms Bardell, to debate the regulations, which were laid before the House on 24 February 2021.

As we strive to rebuild the economy after the challenges that it has suffered as a result of the covid-19 pandemic, it is vital that we have a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike. That is why last year the Government made certain changes to the insolvency regime in the Corporate Insolvency and Governance Act 2020. The changes included reviving a power previously introduced by the Small Business, Enterprise and Employment Act 2015 to regulate sales to connected persons in administration. The power is intended to strengthen the regulatory framework and provide greater reassurance to creditors in respect of what are commonly called “pre-pack sales”.

A pre-pack sale is where a company is in financial difficulties and an arrangement is made for the sale of all or part of the company’s business prior to its entering administration. The sale is then completed on the same day or immediately after the appointment of an administrator. Pre-pack sales are an invaluable part of the UK insolvency framework, allowing viable businesses to be rescued while preserving value and saving jobs. However, the nature of the sale, the speed with which it is carried out and the fact that such sales are often to a person previously connected with the insolvent company, such as a director or relative of the director, has led to criticism and concerns that such sales might not always be in the best interests of creditors.

A number of industry measures were introduced in 2015 to try to ensure greater transparency of pre-pack sales. These included strengthening the professional standards for dealing with a pre-pack sale and the opportunity for a connected purchaser to seek an independent opinion on a transaction on a voluntary basis. A Government review of the measures concluded that they had not gone far enough in restoring creditor confidence. Consequently, the Government have determined that it is necessary to strengthen the legislative framework.

Draft regulations were published in October 2020 for stakeholder consultation, following which we have made certain changes to take account of the feedback received. The regulations provide that an administrator will not be able to make a substantial disposal of an insolvent company’s assets to a connected person within eight weeks of the company entering administration unless creditor approval has been obtained, or the connected purchaser has obtained an independent report from an individual—an evaluator—qualified to do so.

The regulations define what is meant by a substantial disposal. It includes where the disposal takes place through a series of transactions to prevent parties from side-stepping the requirements by parcelling the disposal into a number of smaller transactions. In addition, the regulations make provision about who may act as an evaluator and what their report must cover.

The regulations also impose responsibilities on the administrator, who must review the report and be satisfied that the evaluator has sufficient knowledge and experience. The report must state whether the evaluator is satisfied or not that the disposal is reasonable. An administrator can still proceed with a sale where the report states that the evaluator is not satisfied that the disposal is reasonable, but where this is the case, they must provide a statement to creditors setting out their reasons.

As I mentioned earlier, the regulations were published in draft for consultation, and following comments from stakeholders they have been amended. In particular, we have strengthened the requirements for an evaluator, and they must now also be covered by professional indemnity insurance to carry out the role. We envisage that those acting as evaluators are likely to be accountants, surveyors, lawyers with corporate business experience, and also insolvency practitioners. However, depending on the nature and specialism of the business for sale, individuals in other fields may be suitable to act, provided they meet the relevant requirements in the regulations.

A key concern from stakeholders was the risk of shopping around and commissioning multiple reports to obtain a favourable opinion. For that reason, the regulations require that each report must include details of all previous reports. If a connected person refuses to disclose a previous report, or the evaluator believes they are concealing one, the evaluator must record that in their report. If any previous report includes a statement that the person providing it was not satisfied that the disposal was reasonable, the administrator can still proceed, but they must provide a statement to creditors of their reasons for doing so.

The regulations allow the continued use of pre-pack sales as a viable form of rescue, but at the same time will provide enhanced scrutiny of connected sales, giving greater reassurance to creditors that the sale is appropriate. They will improve and strengthen the reputation of the UK’s renowned insolvency and rescue framework, and will contribute to restoring economic confidence. I commend the regulations to the Committee.

It is a pleasure to serve under your chairmanship, Ms Bardell.

We have supported, and have indeed called for, many of the changes that have been brought through the Corporate Insolvency and Governance Act 1986 and the subsequent extensions. Pre-pack administration sales are a useful tool for quickly rescuing businesses in financial difficulties, and are vital in these current times, but such sales must always be balanced against the need to protect the veracity of the restructuring process and the interests of creditors.

In recent years, there has been criticism of and considerable attention paid to pre-pack sales, which occur before the creditors are given an opportunity to vote on the administrator’s proposals to sell a company’s business or assets. The speed with which the pre-pack sale takes place helps to preserve the value of the business and the jobs, but concerns centre on the lack of transparency for creditors and the fact that, in many cases, businesses or assets are purchased by the same owners or other persons connected with the insolvent company.

The regulations will require that where a person intends to acquire a business or asset from a company in administration within the first eight weeks and that person is connected to the insolvent company, they must seek an independent opinion on that purchase, unless the creditors have already agreed the sale—a principle that we very much support. However, some have raised concerns that this statutory instrument appears to be an attempt by the Government to control the pre-pack sales process without an understanding of what they are necessarily trying to achieve.

Some of the concerns centre around the identity of the evaluator and the qualifications requirements for that evaluator. I note that the Minister mentioned that point, but there is no requirement in the regulations for the evaluator to hold any professional qualifications, so perhaps he could say a bit more about that.

On connected persons, several people wanted a carve-out to be included in the definition of connected persons in the regulations for secured lenders. That has not been included. Will the Minister explain why not?

On the responsibility for the report, stakeholders argued that it should be the administrator and not the connected person who must obtain the qualifying reports. However, that recommendation was not included. That relates to the issue of “opinion” shopping that the Minister mentioned. I note that steps have been taken on that issue, but some concerns still remain.

To conclude, some concerns have been addressed and some have not been addressed fully, so perhaps the Minister could reassure us on those points. However, we are happy to support the regulations today.

I thank the hon. Member for Manchester Central for her constructive response. I will address the issues she raised.

On the definition of connected parties, any changes would require primary legislation and could not be done through regulations. We will monitor what happens and reflect on any changes as we go forward.

In terms of identifying the evaluator, we did not want to introduce unnecessary burdens at this stage. However, we wanted to make sure that the guarantee requirement, whereby the evaluator effectively needed professional indemnity for this charge, would mean that, in the vast majority of cases, if not all, the evaluator would be someone who was regulated by dint of having to have that insurance.

Clearly, pre-pack sales can be contentious, which has been reflected in some of the previous comments on and considerations of the measures. As I said in my opening remarks, when used correctly, pre-packs can be a valuable rescue tool, which is specifically relevant in this particular climate. The powers under which the regulations are made in the Small Business, Enterprise and Employment Act 2015 are sufficiently wide to potentially permit regulations to be made to ban pre-pack sales to connected persons completely, but it was clear from the Government review of the 2015 measures that stakeholders believe that the opportunity to pre-pack a business and to be able to sell it should be preserved, but that there needs to be a stronger regulatory framework. The regulations strike that balance.

Subject to parliamentary approval of the regulations, we will monitor their implementation to see how they operate in practice, in particular to see whether they meet the objective of improving transparency for creditors and whether they dispel the perceived controversy surrounding pre-pack sales. If the evidence demonstrates that problems persist, the Government will consider whether further changes are necessary, including whether pre-pack sales to connected persons should be banned altogether. Similarly, if time proves that the regulations are impeding legitimate rescue attempts, we will consider whether there needs to be an adjustment to the provisions.

It is imperative now more than ever that we have a range of different tools within our insolvency and restructuring framework that allow companies the flexibility to choose the mechanism that will best help their particular circumstances. At the same time, there needs to be confidence that those affected by the insolvency of a company are treated fairly in order to encourage investment and entrepreneurship. I believe the regulations meet that challenge by retaining and strengthening the legislative framework for pre-pack sales to connected persons. I commend the regulations to the Committee.

Question put and agreed to.

Committee rose.