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

Volume 811: debated on Monday 22 March 2021

Motion to Approve

Moved by

That the draft Regulations laid before the House on 24 February be approved.

Relevant document: 48th Report from the Secondary Legislation Scrutiny Committee

My Lords, noble Lords may remember that the Corporate Insolvency and Governance Act 2020 revived a power to regulate connected sales in administration, which this statutory instrument uses. Now more than ever, we need a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike, particularly as we endeavour to rebuild the economy after the challenges it has suffered from the Covid-19 pandemic. The power enables us to strengthen the regime by imposing requirements where sales in administration are made to a connected person.

A pre-pack sale is where the sale of all or part of a company’s business is arranged prior to it entering administration. The sale is then completed by an insolvency practitioner appointed as an administrator. This usually occurs on the same day or immediately after the company enters administration. Pre-pack sales are a valuable part of the insolvency landscape, representing around a third of all administrations. They can be a useful tool to rescue businesses, save jobs and preserve value. However, creditors are often unaware of the sale until after it has been completed and this can cause concerns, particularly where the sale is to a connected person, such as a director or one of their family.

Previous criticism about whether pre-pack sales are always in the best interests of creditors led to a number of industry measures being introduced in 2015. The main aim of these measures was to increase the transparency of pre-pack sales. Key to this was the opportunity for a connected purchaser to seek an independent opinion from a new Pre Pack Pool, a group of experts able to provide an arm’s-length view on the reasonableness of the transaction. Additional measures included strengthening professional standards for pre-pack sales.

There has, however, been a very low uptake of the use of the Pre Pack Pool. Each year, since its introduction in 2015, no more than 22% of connected purchasers have sought independent scrutiny of the offer. A government review concluded that pre-pack sales remain a valuable tool for business rescue, but that industry measures had not gone far enough in restoring creditor confidence. Consequently, the Government announced in October last year that they would regulate to strengthen the legislative framework in this area, principally by requiring an independent scrutiny of pre-pack sales where the sale involves a connected person. Draft regulations were published in October 2020 to seek stakeholders’ views. I thank my noble friends Lord Hodgson of Astley Abbotts, Lady Altmann and Lady Neville-Rolfe, the noble Lords, Lord Vaux of Harrowden, Lord Mendelsohn and the noble Baroness, Lady Bowles of Berkhamsted, for their valuable contributions and useful discussions in developing the regulations further. The comments of noble Lords, along with those of other stakeholders, have been considered carefully and certain changes have been made to take account of the feedback received.

These regulations will mean that an administrator will be unable to make a substantial disposal of a company’s assets to a person connected with it without either the approval of creditors or an independent written opinion. The requirements will apply to a disposal made to a connected person during the first eight weeks of administration. The meaning of a “substantial disposal” is defined in the regulations and the meaning of “connected persons” is set out in primary legislation. To prevent the requirements being circumvented, the definition of a substantial disposal includes sales which are carried out through a number of transactions and/or where these are to different connected persons.

The definition covers not only what would ordinarily be considered pre-pack sales, but any disposal made to a connected person within the first eight weeks of administration. This is to prevent the requirements being circumvented. The independent report must be provided by an individual qualified to do so within the meaning of the regulations and that individual is referred to as an evaluator. The administrator must be satisfied that the evaluator has the relevant knowledge and experience to provide the report. Requirements are also imposed on the evaluator in respect of their independence.

Following comments from stakeholders, the regulations have been strengthened and now require an evaluator to hold professional indemnity insurance to carry out the role. In practice, the role of an evaluator is likely to be fulfilled by certain professionals such as accountants, surveyors, lawyers and insolvency practitioners, along with members of the current Pre Pack Pool who meet the requirements to be able to fulfil the role. Depending on the nature of the disposal, other individuals who meet the requirements may also be suitable to act as an evaluator. The report provided by the evaluator must include a statement that indicates whether or not they are satisfied that the sale is reasonable.

A key concern of stakeholders was the risk of shopping around for a favourable opinion since there is no limit on the number of reports a connected person can obtain. We believe that the circumstances where someone would do this will be limited due to the cost implications and likely delay to the sale. However, in response to these concerns, changes have been made to the regulations to ensure transparency where more than one report is obtained. The evaluator will be required to include within the report the details of all reports that the connected person has previously obtained. If the connected person refuses to disclose a previous report or the evaluator believes that they are seeking to conceal the existence of such a report, that must also be set out in the evaluator’s report. Once received, the administrator must consider the report, circulate it to all known creditors and file a copy at Companies House. If the evaluator’s report states that they are not satisfied that the sale is reasonable, an administrator can still proceed where they consider it is in the best interests of creditors. If that happens, they must provide a statement to creditors setting out their reasons for doing so.

In conclusion, this statutory instrument will provide greater scrutiny of sales where they are to a connected person and give assurance to creditors that such a sale is appropriate in the circumstances. I commend the draft regulations to the House.

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?

My Lords, I thank my noble friend the Minister for his explanation of these regulations, and for his courtesy and that of officials in meeting some of us to explain how thinking in this important area was developing. It is a particular pleasure to follow the noble Lord, Lord Mendelsohn, with his extensive practical experience.

One of the problems with insolvency law is that it is monumentally complex. I know this because I am a chartered company secretary and passed papers which tested me on the law in this area. The course taught me helpful and important lessons about a director’s duties if a company was heading anywhere near insolvency. However, I confess that I do not fully understand all the minutiae of the law and I suspect that I am not alone in this.

Nevertheless, we are where we are, and I thank the Minister for recognising that pre-packs can have value: business is not interrupted, jobs may be saved and a good brand safeguarded, although conflicts have to be watched very carefully. This inherent benefit influenced the Graham report on the future of pre-packs in 2015. I have a lot of time for the common-sense expertise of Teresa Graham. She favoured a voluntary approach with a reserve power, so it is a little disappointing that the Government have now found it necessary to legislate, difficult though this is. The Minister has explained why he thinks this is needed.

A very important Graham recommendation was that there should be a Pre Pack Pool of experienced business people where, on a voluntary basis, details of a proposed sale to a connected party could be disclosed to an independent person prior to the sale taking place, thus giving greater confidence to creditors that the deal had undergone independent scrutiny. This pool has apparently not been much used and that is one of the reasons the Government have moved to a statutory system, with all pre-pack administration sales to a connected purchaser requiring an independent opinion from an evaluator on the sale.

The problem with this provision as now drafted is that the evaluator must only be independent, without obvious blemish on their record, and have relevant knowledge and experience; they do not have to have professional qualifications or be recognised in some other objective way. This moves away from the Graham notion of a Pre Pack Pool of people with knowledge of the industry exchanging good practice and intelligence, which might help to head off trouble. Has my noble friend considered the case for such a pool of evaluators? They could be explicitly recognised by the Insolvency Service, or some other body, and be encouraged to exchange experiences.

I should thank my noble friend the Minister for the progress made in consultation on these regulations. There is, however, a feeling among those I have consulted that he could usefully have made more changes to the consultation draft. Returning to my point about complexity, this is difficult stuff and it needs to be “work in progress”, with changes to the regulations if the need arises. We also need an eagle eye for perverse effects and for those gaming the system—we heard from the noble Lord, Lord Mendelsohn, about his concern about opinion shopping.

Perhaps I could echo the noble Lord’s final point on review; it would be very helpful if my noble friend could outline his plans for monitoring and evaluation and indicate when and how we might receive a review of progress on the new system. I was a little disappointed by paragraph 14 of the Explanatory Memorandum on this point, given the importance and complexity of legislation on insolvency. For example, maybe something could, in practice, be done in the annual report of either BEIS or the Insolvency Service. But I support the regulations and thank the Minister.

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?

My Lords, I too am grateful to the Minister for his, as usual, helpful introduction. Like him, I fear that we will be facing many more insolvencies—not just because of the pandemic, as he indicated, but as a result of the many problems arising from Brexit—so these regulations are timely.

I will confine myself to a few questions, which I hope the Minister can respond to in his reply. First, can he tell us whether all kinds of companies are covered by this provision? I understand from the Explanatory Memorandum that it extends to small businesses but are all types of businesses included? Specifically, will football clubs, some of which are currently in great financial difficulties, be included? As others have done, I also want to ask about the evaluators, who will be given significant responsibilities. As their trade body R3—as well as noble Lords in this debate—has said, it would be helpful to know what qualifications will be required to act as an evaluator. The Minister gave us some examples of professions but he did not describe what specific qualifications they should have. If, for example, they are businesspeople, will they be excluded if they have themselves been involved previously in an insolvency?

How will they all be assessed for honesty and integrity prior to their appointment? Why will there not be a central register of evaluators, or indeed a body responsible for any training and registration and checking their operational effectiveness and reliability? Will the Government consider a register of approved evaluators being maintained by the Insolvency Service, as suggested by R3? However well qualified, an evaluator will not have the final say. If an administrator does not accept the decision of an evaluator that the “case is not made”, all he has to do is “provide an explanation” to allow him to proceed anyway. Does this not make the evaluator’s role effectively impotent?

The Minister helpfully reminded us that the definition of “connected persons” is described in legislation. However, how will the proposed procedure prevent some form of insider advantage being given to connected persons? Can the Minister also tell us how the interests of creditors will be balanced against speed in this procedure? Sometimes their interests can be forgotten in the apparent need for a quick resolution. Finally, and perhaps predictably, I want to ask about Scotland. Here, insolvency is partly devolved. Can the Minister tell us what discussions have taken place to ensure that these regulations are in fact consistent with Scots law, and can he give the House an assurance that this has been accepted by the devolved Administration?

Assuming that the Minister can give us all satisfactory answers, I agree with others that we should approve these regulations.

My Lords, I have been tracking pre-packs and the complications thereof for many years. I begin by adding to those of other noble Lords my thanks to my noble friend the Minister and, in particular, to Paul Bannister and the Insolvency Service, for the time they have given to many of us and the changes that have been made, which are certainly welcome.

Before I turn to the substance of the debate, I want to take one of my five minutes to address the Whip on duty. As I have already noted, I have a long-standing interest in this issue. I was in a business meeting in Stoke on Thursday afternoon when I received a call from the noble Lord, Lord Mendelsohn, to tell me that the debate had been tabled for today and that the speakers’ list would close at 6 pm that evening. I was grateful to the noble Lord but horrified to find out he was correct. My Whip for the week arrived at 15.49 on Thursday, so, with a closing time of 18.00, I had precisely two hours and 11 minutes to read my email and put my name down to speak. I am afraid I have to say to the Whip on duty that that is not good enough. I would like them to take the matter up with the Chief Whip and to inquire how this happened and what will be done to prevent it happening again. If I do not get a reply, I certainly do not intend to let the matter rest.

I once again make it clear that, like other noble Lords, I do not oppose the principle of pre-packs. They are a very useful tool in the insolvency practitioner’s armoury but, as we have said many times, in the hands of the unscrupulous they can too easily turn into a fraud on the creditors. The history of the Government’s approach to pre-packs is of two steps forward followed by one step back. They have never quite been able to nail the issue down once and for all. In part, that is the story today: they do not quite close the door on the ruthless.

There are three issues: first, the failure to create institutional memory, which a mandatory reference to the pre-pack pool would have solved; secondly, there remains a concern, raised by several noble Lords, about the level of expertise required by evaluators despite the welcome requirement to have some level of professional indemnity insurance; and, thirdly, the definition of “connected persons”, raised by the noble Lord, Lord Mendelsohn.

In connection with that, I invite my noble friend the Minister to reread the Explanatory Memorandum that accompanies the regulations. Paragraph 10.1, under the heading “Consultation outcome”, says:

“It is expected that many connected person purchasers will use the Pre-Pack Pool to obtain the independent opinion required by the instrument”,

yet elsewhere paragraph 7.4 states that in 2019 only 23 out of 260 connected person pre-pack sales were referred to the pool, which is less than 10%. How can that possibly be a statement that has any real verification and expectation of being fulfilled? Paragraph 12.1, in the section entitled “Impact”, states:

“There is no, or no significant, impact on business, charities or voluntary bodies.”

If that is really the considered view of the Government, what on earth are we doing sitting here today discussing it all? Meanwhile, the dangers of the new restructuring plan procedures introduced under the Corporate Insolvency and Governance Act, about which many Members of your Lordships’ House raised concerns during the passage of the Bill, are becoming clearer.

I thank my noble friend for what he has done but I am afraid the battle is not yet won. As many noble Lords have said, we need to keep the matter under urgent review over the next few months as we emerge from the pandemic and pre-packs become a very familiar feature of the landscape.

My Lords, on balance this statutory instrument seems to be an improvement worth supporting, although I am sure the caveats put very clearly and eloquently by my noble friend Lord Mandelson and the noble Baroness, Lady Neville-Rolfe, will have attracted the Minister’s keen ear as things move on. I endorse the core points and arguments that they made and bow to their superior knowledge on the detail. I am sure the Minister will have been as persuaded as I was by their arguments.

I come back to the topic of the football industry. There are some interesting aspects in the detail, particularly the period of eight weeks in relation to the football industry. Something that has happened a lot over recent years is that, in order to fit with the rules in England whereby clubs have points deducted and are potentially relegated, there is a tendency for clubs to go into administration at the very end of the football season. Some suggest rather cynically that that is sometimes calculated on whether the points deduction will have a specific financial impact on the following season.

Football has another oddity, which is that for a long time now a club has been allowed its own preferential football creditors. HMRC lost its court case with Exeter City over this in 2012. Given the way that the football industry and its income streams work, there is a period between seasons—sometimes of 12 weeks but sometimes as low as 10 weeks—when clubs tend to be bought and sold. Does the Minister intend at any stage to look at the implications of the loss of that court case, and what it means for the industry and the stakeholders?

One thing that has happened repeatedly, particularly when one goes down the food chain into lower league and so-called non-league football, is that individual traders—for example, the joiner, the plumber or the printer—lose out on money when everyone else seems to be getting whatever money is around. Yet these are precisely the people who are most crucial, while living on very small margins. It can be the cleaner, the window-cleaner or the grasscutter who loses out, and it often is in this situation. Will the Minister take a closer look at this industry in the next year, the rules that it applies and some of the imagination that could benefit government?

One of the inevitabilities of the year-long lockdown or semi-lockdown is that some football clubs, particularly at the non-league level, will, when furlough ends, go out of business. We will see this problem occurring; that is very predictable. This is an industry that has a greater meaning, particularly to small towns, than most other industries or companies. This is about losing the identity of the local football club, because it no longer exists. We have seen football clubs almost disappear. Some have fought their way back, but in places such as Scarborough, Maidstone, Chester or Darlington we have seen them disappear out of mainstream football and very rarely bounce back. The impact on the community is very great. I put it to the Minister that it would be quite a wise investment of time to give the court case of 2012 and its implications, and the way in which these regulations will apply, a specific eye from Ministers during the next year in relation to the football industry.

My Lords, other noble Lords speaking in this debate have more extensive knowledge of the history behind these regulations. Although, like many members of the public, I might have spotted a sale of a business to a connected person and wondered whether it was wholly fair, I became engaged with this only relatively recently: when the opportunity presented itself during the passage of the Corporate Insolvency and Governance Act and the noble Baroness, Lady Neville-Rolfe, revived the issue from the Small Business, Enterprise and Employment Act. Since then the noble Lord, Lord Hodgson, has kept an eagle eye on it. He has been keeping our impromptu group of CIG veterans informed since then.

In addition to the persistence of the noble Lord, Lord Hodgson, our little cross-party group has benefited from the varied professional expertise of the noble Lords the Minister referenced, and the noble Lords, Lord Mendelsohn and Lord Vaux, and the noble Baroness, Lady Neville-Rolfe, have ably demonstrated that in their contributions today. Like them, I am pleased that we have got to where we are, but I agree that this may be part of a continuing journey. I also thank the Minister for meetings and bringing forward these regulations. It is a quirk of the speaking order that I get to speak after those other noble Lords, which leaves everything already well covered.

These regulations introduce a new requirement for an opinion by an evaluator to say whether a sale to a connected party is “reasonable” in all the circumstances. This requirement will come into play frequently. As quoted in Accountancy Age last October, Blair Nimmo, the head of restructuring at KPMG, said:

“When a company goes into insolvency and you need to have a fairly quick sale of the business, the person(s) with the most knowledge of a business and its operation are the existing directors. They are the most likely people to have arranged the pre-pack or at least be part of it, even if it is being funded or orchestrated by an independent party. Scenarios whereby there are zero connections to the previous directors are fairly few.”

That was regarding pre-pack procedures, but evaluators will also come into play in any rapid—that is, within eight weeks—connected person sale through ordinary administration procedures.

I welcome the compulsory aspect of the report because the previous measure of consulting the Pre Pack Pool went greatly underused: as the noble Lord, Lord Hodgson, has already noted, there were only 23 referrals out of 260 connected person pre-packs in 2019. It is now envisaged that the Pre Pack Pool, or members thereof, might be used to obtain the independent opinion required, but it is already possible to find evaluators advertising online. Ones I found appeared to have relevant experience, and perhaps it is a nice job for retired insolvency practitioners, who were the ones that I found.

However, the main criticism levelled against the original proposal was the self-certification nature of the credentials of the evaluators: they need only believe that they have the requisite knowledge and experience to provide the report. That is now bolstered by the need for indemnity insurance, which presumably means that the insurance company must consider that they have the credentials to be an insurable risk—or that the person pays a high enough premium to persuade the insurance company to take the risk. The fact that the insurance premium details, including the insurer and the amount insured, must be disclosed adds to the reassurance, although I am still a little disconcerted with it as the mechanism.

There is still disquiet in some quarters and, as ever, time will tell. The noble Lords, Lord Mendelsohn and Lord Vaux, and other noble Baronesses and noble Lords, have already highlighted several of these—notably, opinion shopping is still not resolved. Secured lenders should perhaps be connected, as the noble Lord, Lord Mendelsohn, has suggested—the administrator applying for the evaluation would solve the opinion shopping point. I also note that the difference between “substantial” and “significant” may also need resolution in due course—as well as the relationship of the evaluator to the company.

That said, I am reassured—I think—in that I now understand that we have regulations which can be amended in future and, therefore, these issues may end up being resolved in due course. However, it would be nice to have the confirmation that the noble Lord, Lord Vaux, has indicated he would like—namely, that June is not the last say and now that the regulations exist, they can continue to be tweaked as more evidence comes to light.

My Lords, as we have heard, this instrument proposes changes to address concerns about pre-packs. In the current context of the pandemic and a potential wave of insolvencies, we need to ensure that the regulations alleviate these concerns effectively. We have constantly pressed the Government to take action against the abuses that were occurring in pre-pack cases. There was a flurry of high-profile pre-pack sales last year, along with corresponding concerns. For example, it was reported that unsecured creditors of Monsoon Accessorize were owed more that £132 million after its founder bought it back out of administration in a pre-pack deal.

The Government have said that despite voluntary measures that were introduced for an independent review of pre-pack sales in 2014, there are still issues with transparency, so this instrument requires that if a person intends to acquire a business or assets from a company in administration and is connected to the insolvent company, they must seek an independent opinion from an evaluator on the purchase, unless creditors have approved the sale. The instrument also sets out certain requirements for the person acting as an evaluator, such as the need for indemnity insurance. It prevents a person from obtaining multiple evaluator reports—opinion shopping, as was said—in the hope that one might prove favourable.

The Government have said that

“the mandatory referral to an independent third party will provide creditors with greater assurance that such a sale is appropriate in the circumstances of the insolvency.”

As we have heard,

“there’s still some way to go if these reforms are going to improve stakeholder confidence in pre-pack administrations.”

The trade body R3 has said that the legislation unfortunately risks critically undermining, rather than improving stakeholder confidence in pre-packs. Without ensuring the integrity of the evaluator involved by maintaining a list of approved evaluators, the Government will undermine confidence in the wider regulatory framework around pre-packs, effectively outsource responsibility for ensuring the suitability of the individual evaluators to the market and add unnecessary complication to business rescue efforts.

R3 also said that

“there is no framework in place to ensure qualifying criteria for the Evaluator position are being met.”

Can the Minister explain why this is the case? Does he believe that the new requirement for an evaluator to have a professional indemnity will be sufficient to secure the confidence of the wider business community?

The regulations also place a new requirement on administrators who must be

“satisfied that the individual making that report had sufficient relevant knowledge and experience to make a qualifying report.”

This means that the administrators will effectively be charged with ascertaining the suitability of individual evaluators. What happens if the evaluator may be purposefully or successfully misleading? If there is not a central register of evaluators, to whom does an administrator complain if they have been misled? How can inappropriate evaluators be reported and to whom should they be reported?

The British Property Federation has said:

“It is … disappointing that the regulations allow a sale to proceed despite a negative opinion. A negative opinion should mean the sale cannot proceed.”

Why have the Government not taken this approach? Where the case is not made, an administrator will still be able to proceed with the sale to a connected person but will need to provide an explanation of why they have proceeded. What should be included in this explanation of allowing the sale? Have the Government considered maintaining a list of approved evaluators? How will the Government ensure that all evaluators have relevant business experience to give an opinion on whether a case has been made by an individual or connected party for pre-pack sales?

The government report from last October said:

“The government does not, therefore, propose that the power to ban connected party sales in administration should be used.”

Can the Minister say how this conclusion was reached?

We need clarity in these regulations about how they work in practice, especially if the withdrawal of government Covid support results in a wave of insolvencies and the increased likelihood of pre-pack deals. We are grateful in this House to have the knowledge and experience of the noble Lords, Lord Mendelsohn, Lord Hodgson and Lord Vaux, and the noble Baroness, Lady Neville-Rolfe, in this area. We need clarity across the piece.

I thank all noble Lords for their valuable contributions to this debate. Yet again the House has shown the great value of the experience in this area with some very valuable and well-thought-through contributions. I say to my noble friend Lord Hodgson that I had no say in the timings of the debate, but I know that the noble Baroness, Lady Bloomfield, has taken careful note of his comments and will reply to him directly about the timescales.

Pre-pack sales are of significant interest in our economy and this is reflected in many of the comments made today. They are a valuable rescue tool where a company in financial difficulties has underlying value and is potentially viable. This is particularly relevant in the current economic climate, with many businesses struggling with the impact of the pandemic. Having a range of rescue vehicles for viable businesses within the insolvency framework will aid the recovery of our economy.

The power under which these regulations are made would potentially have permitted regulations to be made banning pre-pack sales to connected persons completely. It was clear from the government review of the 2015 industry measures that stakeholders believe that the opportunity to pre-pack a business to a connected person should be preserved.

In some circumstances, the business only has value to those connected to the insolvent company and a pre-pack sale is the best way to preserve that value for the creditors. However, it was recognised that there needs to be a stronger regulatory framework to prevent the risk of abuse for creditors.

The Government consider that these regulations will provide the additional safeguard and transparency of independent scrutiny while still enabling the rescue of viable businesses through a pre-pack sale. Let me assure the noble Lord, Lord Mendelsohn, that, subject to parliamentary approval of this statutory instrument, the Government will monitor its implementation to see how the regulations operate in practice. We will also provide guidance to assist connected persons, evaluators and administrators to understand their responsibilities under these regulations. In addition, we are working with the industry to strengthen professional standards for pre-pack sales.

The legislative and non-legislative changes will be monitored together to see whether they meet the objective of improving transparency and creditors’ confidence. If there is evidence that problems persist or that new issues have arisen, the Government will consider whether further changes are needed, including whether pre-pack sales should be banned altogether. Likewise, if there is evidence that the regulations are impeding legitimate rescue attempts, we will consider whether further adjustments are needed. As the economy and businesses strive to recover from the impacts of Covid-19, it is important that we have flexibility within our insolvency and restructuring framework. This will allow companies in financial distress to find the right mechanism to best help their particular circumstances, while balancing the needs of those affected by the insolvency to ensure that they are treated fairly and have confidence in the process.

With the time I have remaining, let me deal with a number of the questions that were asked. The noble Lords, Lord Mendelsohn, the noble Baroness, Lady Bowles, and my noble friends Lord Hodgson and Lady Neville-Rolfe, all asked why we did not mandate opinions from Pre Pack Pool; indeed, many noble Lords have asked me about this separately. The reason this did not prove possible is that it is a private limited company, so there are wider legal implications—both under competition law and in the scope of the regulation-making power—for seeking to make a single private company a monopoly provider of authorisations to take certain steps under insolvency law.

The noble Lord, Lord Mendelsohn, asked why the regulations do not define what is meant by “substantial” and whether there will be guidance on this matter. Since what constitutes a substantial sale may be different in any given case, depending on the nature of the business, this has been left to the administrator’s judgment. “Substantial” is used elsewhere in insolvency legislation, so administrators are used to making this type of judgment in the normal course of their duties. However, examples will be provided in guidance as to what may constitute a substantial sale in a particular case to aid the administrator. Also, on using “significant” or “substantial” in the definition, “substantial” is used elsewhere in insolvency legislation, so insolvency practitioners are already familiar with the term. However, again, we will monitor the impact.

The noble Lord raised the issue of secured lenders. Some secured lenders will potentially be caught by the definition of “connected persons” where they are entitled to exercise more than one-third of the voting rights. As with all good provisions, we will of course keep this under review.

The noble Lord also asked why the regulations do not make the administrator responsible for obtaining a report at the connected party’s expense. As the vast majority of pre-pack sales are arranged prior to an administrator’s appointment, with the sale completed on day one, placing a requirement on the administrator to be responsible for obtaining the opinion would cause a delay to the sale, which would increase costs and potentially hinder the business rescue.

My noble friends Lady Neville-Rolfe and Lord Hodgson, and the noble Lord, Lord Mendelsohn, asked whether we intend to review these regulations when they are in force. As I said earlier, we intend to monitor the implementation of this SI and will consider modifying or supplementing its provisions in the future if it proves necessary to do so. We will work with the insolvency regulators, professional bodies and opinion providers that are implementing the regime to work out whether any changes are necessary.

A number of noble Lords—my noble friend Lady Neville-Rolfe and the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie—asked me about a list of approved providers or evaluators. The Government take the view that this would be an unnecessary administrative burden on government at a time when public resources and expenditure are under severe pressure. A person whose knowledge and experience are suitable in one context might be unsuitable in a different context. A list would not therefore remove the need to consider whether a person’s knowledge was sufficient on a case-by-case basis.

The qualification requirements for evaluators was raised by the noble Lords, Lord Vaux, Lord Foulkes and Lord Lennie. As I said earlier, the administrator will need to be satisfied that the evaluator has sufficient knowledge and experience to produce the report and meet the other requirements of the regulations. Guidance will be provided for administrators to help them meet those conditions. We recognised where there were stakeholder concerns about this issue and subsequently strengthened the regulations by including a requirement that the evaluator hold professional negligence insurance.

The noble Lord, Lord Vaux, asked about the requirement for further reports and a potential penalty. There would be difficulties in introducing new penalties via the regulations and we have aimed to take a proportionate approach. The noble Lord asked also why the restriction on providing previous professional advice is limited to 12 months. A three-year restriction might impact the number of available suitable individuals able to provide an opinion, so is too long a period. We consider that 12 months is appropriate.

The noble Lord, Lord Foulkes, the noble Baroness, Lady Bowles, and other noble Lords asked about timing. Assuming that Parliament approves these regulations, it will be possible to amend them post the prior primary power sunsetting, so, yes, we can come back to them in the future even if the original primary power has sunsetted.

The noble Lords, Lord Foulkes and Lord Lennie, asked why the regulations allow the administrator to proceed with a sale if the evaluator provides an unfavourable report. I dealt with this in my opening remarks. The regulations provide a specific role for the evaluator which is confined to the provision of the report and determination of whether the grounds and the consideration to be provided for the sale are reasonable. The administrator is an officer of the court and has a statutory duty to act in the best interests of creditors as a whole.

The issue of Scotland was raised, as usual, correctly and appropriately, by the noble Lord, Lord Foulkes —it allows me to make a comment also about the other devolved Administrations. All the devolved Administrations have been informed of the intention to regulate, and officials have kept closely in touch with devolved colleagues on the proposals. If these regulations are approved by Parliament, they will apply in England, Scotland and Wales. An equivalent power to regulate connected persons sales in administration for Northern Ireland was created by the Corporate Insolvency and Governance Act 2020.

The noble Lord, Lord Mann, raised Football Index and Exeter City Football Club. We recognise the serious concerns of Football Index customers about these developments and the worry that will have been caused. I understand that the Gambling Commission has been investigating this company for some time and has suspended the operator’s licence while it continues. The Secretary of State for Culture and the Minister for Media and Data have met the Gambling Commission twice in the past fortnight to discuss this issue and have requested and received urgent updates. The noble Lord will understand that I cannot comment on an ongoing investigation, beyond saying that we are closely monitoring the situation.

The noble Lord, Lord Lennie, asked about banning pre-pack sales. I dealt with that earlier; it is possible we might come back to this in future if it proves not to be working. The noble Lords, Lord Vaux and Lord Lennie, raised the issues of the evaluator being a regulated professional and of how creditors can be assured that the report has been produced by someone with suitable skills. The regulations require that the individual providing the report should have professional indemnity insurance cover, as I said earlier.

I think I am out of time; I apologise to noble Lords whose questions I have not answered. If necessary, I will come back to them in writing. In conclusion, I believe that, by strengthening the legislative framework for sales to connected persons in administration, these draft regulations meet the challenge set for us. I therefore commend them to the House.

Motion agreed.