South East: R3 warning over pre-pack administration announcement

Garry Lee, chair of the R3 Southern and Thames Valley region, has commented upon amended legislation for the reform of pre-pack administrations published by the Government.

A key element of the reforms is the role of an ‘evaluator’ – an individual who will provide an independent opinion about whether connected party pre-pack sales are fair and appropriate. Lee, who is an associate director in the recovery and restructuring services department at accountancy firm Smith & Williamson, said that the proposals don’t go far enough.

“While the amended regulations published today are an improvement on the initial legislation released in October last year, there's still some way to go if these reforms are going to improve stakeholder confidence in pre-pack administrations. In particular, there is no framework in place to ensure qualifying criteria for the evaluator position are being met.

“The new requirement for an evaluator to have professional indemnity insurance – which R3 proposed as a minimum requirement – will not be enough on its own to secure the confidence of the wider business community.”

Pre-pack administrations involve arrangements to sell part or the whole of a company’s business or assets prior to the company entering into administration. The sale is completed on or shortly after the appointment of an administrator and the speed of the transaction helps preserve the value of the business while saving jobs.

A connected party is someone who has had a prior connection or interaction with the company being sold. Lee said: “The role of the evaluator is being introduced to give stakeholders greater confidence that connected party pre-packs are legitimate.

“Not only does an evaluator need to be 'above board', but they need to have relevant business experience to give an opinion on whether a case has been made for individual connected party pre-pack sales.

"We recognise the difficulties the Government faces in legislating for this, but the responsibility for ensuring the suitability of the evaluator position shouldn't simply be outsourced to the market to deal with. The entire point of the reforms is to ensure that there is an independent third pair of eyes' reviewing these sales. As it stands the legislation doesn't do enough to set the appropriate framework to guarantee that the evaluator will fulfill that role in each instance.

"One potential solution is for the Government to maintain a list of approved evaluators. This may pose more of a burden for the Government, but it's the only way to ensure that evaluators are suitably qualified, hold adequate professional indemnity insurance and have the relevant experience, to carry out the role."

The new legislation is due to come into force on April 30.