New rules coming into force at the end of the month will have a major impact on company directors seeking to restructure their business through pre-pack administrations.
The warning comes from Derek Forsyth, head of restructuring in Scotland with accountancy firm Azets, on new legislation coming into force on 30 April.
Pre-pack administrations have been used increasingly during the pandemic to save businesses that would otherwise go under.
The new rules will impose an new eight-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 pre-pack is in the best interests of creditors.
Such a report would be prepared by an evaluator chosen by the purchaser and will be made available to the creditors.
While 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.
Forsyth said: “Pre-pack 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 pre-pack 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,” Forsyth explained.
“While 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 on insolvency practitioners to demonstrate to the creditors that fair value has obtained from the assets, which with the current pre-pack 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.
This is particularly the case when they see the same directors immediately involved in the new company following an apparently seamless transfer of assets.
Forsyth also warned that directors are facing further pressures from new legislation introduced in 2020 which gives HM Revenue & Customs 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.
“While 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.”
Don’t miss the latest headlines with our twice-daily newsletter – sign up here for free.