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Pressure on Directors Tightens with New Prepack 8 Week Rule

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New legislation coming into force from 30th April for prepack administrations is set to impose a new 8-week window in which the assets of an insolvent business cannot be sold to a connected party without the consent of creditors, or a report from an independent evaluator recommending that the prepack is in the best interests of creditors.

This report, which will be prepared by an evaluator chosen by the purchaser will be made available to the creditors, and whilst the administrators are not bound by the report’s recommendations, they will have to justify to the creditors if they decide not to follow the recommendations.

Nicola Clark, Head of Restructuring in the North West with Azets, is warning that the new rules will have a major impact on Directors looking to restructure their businesses through prepack, and require them to ensure they make the correct insolvency decisions:

“Prepack insolvencies are a valuable restructuring option for businesses weighed down by debt which could otherwise be viable through a restructure but are not capable of continuing to trade whilst the administrator markets the business for sale.  In these circumstances a quick sale is required to protect the business and employment, otherwise the assets will only realise low auction values.”

“Until now, a purchaser has been able to seek the opinion of a prepack pool of experts, but this option has been little used.  Although it is expected that the new legislation will offer greater transparency to creditors, there is some concern around the qualifications required of the evaluator chosen by the purchaser. Whilst this could potentially be problematic, we expect this issue will be resolved relatively quickly, with individuals with the required insolvency experience being identified as credible evaluators.”

Current legislation places the onus very much on insolvency practitioners to demonstrate to the creditors that fair value has obtained from the assets, which with the current prepack rules are typically sold by them immediately after their appointment. This type of sale to a connected party, with no post insolvency marketing, has been criticised by creditors in the past as lacking in transparency, particularly when they see the same directors immediately involved in the new company following an apparently seamless transfer of assets.

Nicola Clark also warned that Directors are facing further pressures from new legislation introduced in 2020 which gives HMRC the ability in certain circumstances to pursue directors personally for debts due where the directors have been involved in several ‘phoenix’ type arrangements over a specified period:

“Whilst there have been no publicised recovery actions in the short period to date, the new legislation signifies a harder line being taken by HMRC on those directors who have repeatedly phoenixed businesses to the detriment of creditors.  Our advice to directors concerned about these new rules is to seek advice sooner rather than later as the wrong decisions could be very costly, both financially and reputationally.”