Employment Solicitor Chris Dobbs outlines some key considerations for employers to try and limit the risk of hybrid working disputes and claims
How to tame your phoenix - New Regulations on phoenix sales
He explained about the new regulations affecting phoenix sales, what they mean for insolvency professionals, and the consequences of getting it wrong.
This article is pretty comprehensive, so you can skip to the part that is most relevant to you by following the links below:
- What are the new pre pack regs?
- What is a phoenix company sale?
- Who is deemed a connected party?
- How do you identify connected parties?
- How do new pre pack regs affect a phoenix sale?
- Qualifying reports
- Independent evaluators
- Consequences of a breach
- Malcoms summary - actions for IPs
New regulations on phoenix pre pack sales, catchily-named The Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, come into effect soon. You may also see these referred to as TARoDetCPR. I will refer to them as throughout this article and the connected presentations as the new Phoenix Pre Pack Regs.
As expected, there is a new SIP 16 (Pre-packaged Sales in Administrations) and a new SIP 13 (Disposal of Assets to Connected Parties in an Insolvency process) to implement the new pre pack regs.
When do the new pre pack regs come into force?
The new pre pack regulations come into effect on 30th April 2021.
They will be triggered by you taking appointment as an administrator on a new administration on that date or later. They will not apply to administrations that started on an earlier date
For the purposes of the new pre pack rags, a phoenix is a 'substantial disposal'. A substantial disposal will trigger your new obligations to comply with the regulations.
So, what is a substantial disposal?
As defined in the new pre pack regs, a substantial disposal is:
- The disposal, hiring out or sale
- Of a substantial part of BustCo's business or assets (or all of it)
- By an administrator
- Within 8 weeks after BustCo goes into administration (count 56 days. The appointment date is day 1).
- In a single transaction or series of transactions
- To a connected person
What is a substantial part in a pre pack?
Put simply, it's 'a big bit'. It is not explitly defined in the new regulations, so my suggestion would be to err on the side of caution when considering this.
Even in a break up sale, your agent may sell a 'substantial part'. A property sold at auction could be considered a substantial part, as could a laptop holding a marketing database.
If you put yourselves in the regulator's shoes; they will look at it from the perspective of someone making a complaint. If it looks like a ‘substantial part’ to external stakeholders (creditors, suppliers etc), then it will probably be considered as such.
Action points for administrators on sale of assets for new pre pack regs:
- Review instruction letters to agents
- Review instruction letters to auctioneers
The definition of a connected party used in the new pre pack regs can be found in the primary legislation, in paragraph 60A of schedule B1. It was due to expire in June, but has been extended.
Think of BustCo as surrounded by a cloud of ‘relevant persons’; they are:
- The BustCo's directors, including shadow directors and other officers
- Associates of the company
- Associates of the directors
So, put simply, a ‘relevant person’ is the buying company’s directors and the associates of it and them.
Think of the buying company as also surrounded by a similar cloud of ‘relevant persons’.
The buyer is a connected party if there is just one person (or more) who is (or ever has been) in both those clouds.
We use the same definition as in s435 of the Insolvency Act 1986, with the exclusion of employees (to allow for transfer of existing employees under TUPE). This includes the following:
- Their family
- Business partners
- Trustees and beneficiaries in a trust
- Companies under common control (even if the link is through associates)
- Companies and their controllers (even if the control is through associates)
- Control of a company can be by actual control
- Control of a company can be through one third of the voting rights (and that through other companies)
If just one person is an associate of both BustCo and the buying company, you will need to follow the new pre pack regulations.
The principle behind this is to identify directors and people formerly in control of the business.
Suppose any person is (or ever has been)
- An associate of BustCo (other than only an employee); or
- A director (officer, or shadow director) of BustCo; or
- An associate of a director (etc) of BustCo (other than only an employee);
- An associate of NewCo (other than only an employee); or
- A director (officer, or shadow director) of NewCo; or
- An associate of a director (etc) of NewCo (other than only an employee);
- BustCo and NewCo are connected.
As an administrator, it will be very difficult to be 100% certain that there is no connection using these parameters. It will therefore be sensible to have specific warranties and representations from the purchaser to confirm they are not aware of any connection, having made appropriate enquiries, or that they will dislclose that there is a connection.
How to tame your phoenix
Essentially, you have two options when acting as administrator in a phoenix sale to a connected party.
- Legitimate avoidance
Interim licenses will not work, as hiring out is a disposal. 'Selling to the director's mate', in a series of transactions also will not work. These are options that the legislation has been designed to outlaw.
As an administrator, you could use liquidation, rather than administration, as the procedure of choice. The new pre pack regs do not apply to liquidations, only administrations.
You could wait 8 weeks before selling anything to anyone. In this case you would need to trade or mothball the business for 8 weeks before selling anything.
You could choose not to sell a 'substantial part', which will be difficult under the new regs definitions.
You could sell to an unconnected party, however this will also be difficult, considering the scope of the definition in the new pre pack regs.
If you are stuck with a phoenix, and you have to comply with the new pre pack regs, what do you have to do?
There are two options you have as an administrator in a phoenix sale under new regs:
- Get creditor approval
- Get a 'Qualifying Report ' from an 'Evaluator'
Creditor Approval in pre pack sales
The first option when faced with a phoenix as an administrator under new regs is to get creditor approval.
You don't need to get approval in advance. If you are confident the creditors are behind it, you can sell right away.
In order to get approval, you will need to circulate details of the transaction in your proposal, then ask the creditors for a decision.
A simple majority is required and the decision cannot be rolled up with other resolutions. It must be a stand-alone resolution.
You can use deemed consent, there is no requirement to get consent through a ‘decision procedure’.
Creditors have the right to modify, and can ask for changes to the terms of the sale before approving or otherwise, as long as you, as administrator, consent (you have a veto).
It is the responsibility of the purchaser to find an evaluator, however as an administrator, you will need to decide whether the evaluator is appropriately qualified, but you should give them the benefit of the doubt.
Administrators’ firms should consider having a consistent policy on approval, which takes into account the experience and qualifications of the independent evaluator, and can be sent to purchasers in this position.
Administrators need to evaluate any report and certify it as a qualifying report.
An independent evaluator will need to produce a report on the proposed sale, having considered it against the new regulations.
The report will draw a conclusion as to whether they are satisfied or are not (a 'case not made' opinion).
There is a full checklist in the regulations as to what the report needs to contain, however key to the process is their decision as to whether:
- The price is fair and right
- The grounds are reasonable
The report will be sent (in a redacted form, if appropriate) to Companies House and the creditors
What to do with an unhelpful or negative qualifying report
As an administrator, you do have the ability to overrule the evaluator and sell the business to the interested party, however you have to prepare a written report explaining why you are doing so. This becomes a matter of public record if you decide to do so.
If you consider this, you need to be aware of paragraph 74 of schedule B1, which gives creditors the right to ask the court to intervene if a decision of an administrator causes unfair harm.
The buyer can get a second evaluation, however the new evaluator will need to disclose the initial evaluation in their report and explain why their conclusion differs from it if it does.
If circumstances change, to make a report badly out of date, you should not certify it as a qualifying report and the connected party should commission another.
How do you get a qualifying report for a pre pack?
At Frettens, Malcolm can act as an independent evaluator in pre pack sales. You can read more about pricing and turnaround times here.
What is an independent evaluator?
An independent evaluator should be suitably experienced and properly insured.
Evaluators self-certify that
- They have the right knowledge and experience.
- They are properly insured.
- They are independent.
- They are not disbarred.
The administrator must also decide whether the Evaluator is up to the job.
- They must think about the Evaluator’s knowledge and experience.
- But can otherwise give them the benefit of the doubt.
Making sure an evaluator is independent
Evaluators must not be connected with:
- Its associates
- Anyone connected with a connected party.
Evaluators must not:
- have any (financial) interest that might cause a conflict of interest.
- have given related advice to the company or connected party in the last year.
- be the administrator.
- have gone to prison for a crime of dishonesty.
- be insolvent.
If you don't get creditor approval or an evaluator's report, the new regs don't detail the consequences.
It would be fair to assume that in some circumstances, courts could declare the sale invalid and set it aside.
Applications to court under paragraph 74 or 81 could see an amendment to the sale or see you removed from office as administrator.
Key considerations in addition to those discussed above are as follows:
- Consider the alternatives
- Involve creditors pre-appointment
- Have a friendly evaluator lined up in good time and be ready for the process
Malcolm’s key points to administrators are these:
- Tighten up your engagement terms with agents – they must get a legally enforceable confirmation from buyers about whether they are ‘connected’ with the insolvent company. Then the sale terms must allow time for compliance.
- Tighten up your engagement terms with auctioneers – their bidding terms also must have enforceable declarations about connections. And, when there is a connection, early auction sales by administrators may need to be conditional.
- Tighten up your engagement terms with solicitors – to ensure that they prepare compliant sale terms when they need to.
- Consider setting advance criteria for evaluators, so buyers will know who will be acceptable to you.
- Remember that a disposal of a single, relatively low value asset may still constitute a ‘substantial part’ of the business (and so trigger the need for compliance).
- Remember that you may not know if there is a connection between the buyer and the company in administration. Hence my suggestion that you need to make sure that agents (etc) flush out connections at an early opportunity.
- Relax, if you’re selling assets more than eight weeks after your appointment.
- Think about whether you could get a similar result through a liquidation (rather than administration).
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