Amidst the flurry of legislative activity presaging the Corporate Insolvency and Governance Act, longstanding concerns over the perceived abuses associated with connected party pre-pack sales resurfaced in the House of Lords. The pre-packs carried out by fashion retailers ‘Quiz’ and ‘Monsoon’ were cited as egregious instances of a phenomenon in which existing owners ‘buy-back’ their business out of administration on the cheap, unscrupulously shedding their unsecured creditors in the process.

The government refused to be drawn into immediate action at the time. Instead, it chose to revive a power, introduced in 2015 and which had previously expired without being used in May this year, permitting the Secretary of State to introduce regulations restricting or prohibiting connected party sales in administration.

It has now indicated that it wishes to exercise this power. The government yesterday announced that it intends to prohibit the disposal of property to connected parties within the first 8 weeks of an administration, unless: (a) the administrator obtains the approval of the company’s creditors, or (b) the purchaser has provided the administrator with an independent written report, stating whether the case for the disposal is, or is not, made out.

Somewhat curiously, and in contrast to previous suggestions for reform, the draft regulations do not require this report to necessarily be obtained from the Pre-Pack Pool. Individuals providing a report must merely be (a) independent, (b) consider themselves sufficiently experienced, and (c) not be otherwise disqualified, eg on the basis of a previous conviction involving dishonesty.

On the assumption that independent opinions can be obtained more cheaply and quickly on the open market, it will be interesting to see what this effect this decision has on the Pool’s future viability. Government support for this initiative at present appears to be at best lukewarm: the explanation given for not simply requiring all connected parties to approach the pool (namely that ‘this was not the intention when the enabling power was created’) seems somewhat questionable, not least given the wording of the statute itself.

As is presently the case where an opinion is voluntarily sought from the Pre-Pack Pool, an administrator will not be precluded from proceeding with a transaction if the independent report states that the case for the disposal is not made out. They will, however, be required to provide a statement to creditors setting out the reasons why they chose to proceed. In any event, the administrator will be required to send a copy of the independent report to creditors

The Government has also signalled its intention to work with industry stakeholders and regulators to update and (yet again) more generally strengthen compliance with the disclosure and marketing requirements set out in SIP-16. If these measures are deemed unsuccessful, it has threatened to ‘consider whether further legislative changes are necessary.’

Tim Koch is a recent BCL graduate, and is currently interning in the Business, Financing Restructuring Team at Weil, Gotshal and Manges LLP.