New evaluator role in pre-pack scrutiny too vague

Insolvency practitioners are calling for stricter qualifications for the role of evaluator after the Insolvency Service announced new laws to scrutinise pre-pack sales of businesses in which two parties are connected.

“I can’t imagine how an evaluator would properly assess a pre-pack if they did not have a fairly detailed understanding of insolvency, the nature of pre-packs, business valuations and etc.” says Blair Nimmo, UK and global head of restructuring at KPMG.

“We need to have far more detail about the experience and qualifications an evaluator is likely to require.”

The current draft regulation is lax on the requirements of the evaluator.

As it is currently written it states: “An individual meets the requirements as to qualification [of an evaluator] if the individual believes that they have the requisite knowledge and experience to provide the report.”

Lance Ashworth, barrister at Serle Court Chambers says without a tightening of qualification, the role amounts to little more than window dressing. “The role of the evaluator is tricky, because the requirement is you only have to think you are up to the job.”

“I could be an evaluator. I could declare that I think I’m perfectly qualified to be an evaluator, right now it’s a self-certification regime. This also brings into question, what the liability is going to be on an evaluator who gets it wrong.”

The Insolvency Service is inviting comments around the proposals until November 5.

With the majority of pre-pack sales having two connected parties, Nimmo says most pre-packs arrangements will be affected by the new proposed laws.

“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.”

Phoenix pre-packs

Ashworth says that one of the main objectives of this new legislation is to  eliminate ‘phoenixing’, which is where a company can leave behind certain debts by selling off the business in a pre-pack to a new company, with the same set of directors running the new firm.

“The main problem with pre-packs is the problem of phoenixing. This new law seems expressly meant to address the concerns that creditors have where directors can concede their debts through a pre-pack sale. They can put the old company down and start a new company up and leave some of their creditors behind,” he says.

“They take all the goodwill of the business such as it was, because they are trading with the same name and just start again.”

Prior to the announcement of the new regulations, insolvency practitioners were worried that pre-packs could be banned.

A review commissioned by the now defunct Department for Business, Innovation and Skills of pre-pack sales and completed by Teresa Graham in 2014 found that some organisations consulted were of the view that pre-packs should be banned outright. Ultimately, Graham disagreed with that assessment and did not put it forth as a recommendation but fears remained that it was an option.

“Pre-pack sales are a very common tool that are used save companies. Our initial reaction is we’re pleased they haven’t outlawed them. They’re a legitimate and well used tool that saves businesses, creates value for the creditors and preserves employment for the distressed business’ staff,” says Nimmo.