The transparency of selling a company in Administration to a connected party

As has been reported widely in the press, the effects of the collapse of Kirkcaldy-based Havelock Europa plc in the first week of July were softened to an extent by the immediate pre-pack sale of the business to a venture capital firm in London, thereby saving 320 jobs : at least temporarily. A similar situation arose when House of Fraser was bought from the administrator and Mike Ashley indicated that his current proposal is to retain store outlets/jobs.

Before a company enters administration, discussions take place with the prospective administrator about how best to preserve value for all stakeholder groups. Clearly, some groups will be unhappy when a company fails e.g. creditors when they realise that their accounts will not be settled in full, but there is a duty on the selling company/administrator to look at the bigger picture and take a view on what will produce the best result overall.

In November 2015 the government introduced the pre-pack pool “ the pool “. The pool comprises a group of experienced people, currently 19 according to  the pool’s website, who can provide an independent view on the proposed sale of a company’s business/assets to a connected party. It is not known if the pool was called into action in either the Havelock or House of Fraser cases.

When called upon, a member of the pool is requested to provide a view immediately prior to date of administration in order that that the administrator can act quickly when appointed, thereby introducing certainty of outcome. Turnaround time is targeted at 48 hours given the general urgency that exists in such a situation. A key aspect of creating a pool was in response to creditor concern that a company could be sold to a connected party too quickly and without adequate third party review. Supporting the process of seeking a pool view about a prospective sale to a connected party are the insolvency guidelines that require an administrator to advise all creditors why a connected party sale was the best outcome in the circumstances.

When requested, the pool report is designed to offer one of three opinions :

  1. That the case for a pre-pack sale is not unreasonable.
  2. That the case for a pre-pack sale is not unreasonable subject to more information being provided.
  3. A suitable case has not been presented for a pre-pack sale to proceed.

The pool’s annual review was published in May 2018 and reminds readers that the responsibility for a referral to the pool is that of the connected party purchaser i.e. not the administrator-elect, nor the selling company. The use of the pool is not mandatory when a connected party sale occurs and may explain why about 25% of such sales were referred to the pool in 2016, and only around 10% in 2017. Perhaps surprisingly low when one considers that when the government introduced the pool arrangement, they also gave themselves the somewhat draconian power to ban or regulate all connected party sales when administration incepts ( at any time up to 2020 ).

The pool’s report also discloses that of the 1,289 administrations in 2017, only 356 were subject to a pre-pack sale and, of these, less than 60% were to a connected party. Quite a small number although it is acknowledged that some of the cases have been high-profile names which have perhaps attracted a disproportionate level of attention.

One view is that, in general terms, insolvency practitioners find that the level of creditor engagement is low i.e. most creditors are content to rely on the tight regulation of every insolvency practitioner to act correctly and ensure full disclosure of everything that has happened surrounding the formal insolvency and decision to sell assets. An independent review which helps to endorse the administrator’s decision to sell assets in a certain way is often comforting but, perhaps unsurprisingly, any immediate sale upon appointment tends to have been discussed/reviewed/negotiated in great detail by numerous advisers before it happens. One might take the view that the level of scrutiny  by several parties means that any sale process offers sufficient checks that the sale is at fair value and in the interests of all stakeholder groups generally.

It is understood that the government are reviewing the effectiveness/worth of the pool system and it remains to be seen how it will operate in the future, and with what power.

The views expressed in this article are those of Michael J M Reid, licensed insolvency practitioner and partner of Meston Reid & Co, chartered accountants, Aberdeen. They do not purport  to represent the views of the firm in general.