Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021

Motion to Approve

Moved by

That the draft Regulations laid before the House on 24 February be approved.

My Lords, noble Lords may remember that the Corporate Insolvency and Governance Act 2020 revived a power to regulate connected sales in administration, which this statutory instrument uses. Now more than ever, we need a strong and robust insolvency regime to provide confidence to businesses, creditors and investors alike, particularly as we endeavour to rebuild the economy after the challenges it has suffered from the Covid-19 pandemic. The power enables us to strengthen the regime by imposing requirements where sales in administration are made to a connected person.

A pre-pack sale is where the sale of all or part of a company’s business is arranged prior to it entering administration. The sale is then completed by an insolvency practitioner appointed as an administrator. This usually occurs on the same day or immediately after the company enters administration. Pre-pack sales are a valuable part of the insolvency landscape, representing around a third of all administrations. They can be a useful tool to rescue businesses, save jobs and preserve value. However, creditors are often unaware of the sale until after it has been completed and this can cause concerns, particularly where the sale is to a connected person, such as a director or one of their family.

Previous criticism about whether pre-pack sales are always in the best interests of creditors led to a number of industry measures being introduced in 2015. The main aim of these measures was to increase the transparency of pre-pack sales. Key to this was the opportunity for a connected purchaser to seek an independent opinion from a new Pre Pack Pool, a group of experts able to provide an arm’s-length view on the reasonableness of the transaction. Additional measures included strengthening professional standards for pre-pack sales.

There has, however, been a very low uptake of the use of the Pre Pack Pool. Each year, since its introduction in 2015, no more than 22% of connected purchasers have sought independent scrutiny of the offer. A government review concluded that pre-pack sales remain a valuable tool for business rescue, but that industry measures had not gone far enough in restoring creditor confidence. Consequently, the Government announced in October last year that they would regulate to strengthen the legislative framework in this area, principally by requiring an independent scrutiny of pre-pack sales where the sale involves a connected person. Draft regulations were published in October 2020 to seek stakeholders’ views. I thank my noble friends Lord Hodgson of Astley Abbotts, Lady Altmann and Lady Neville-Rolfe, the noble Lords, Lord Vaux of Harrowden, Lord Mendelsohn and the noble Baroness, Lady Bowles of Berkhamsted, for their valuable contributions and useful discussions in developing the regulations further. The comments of noble Lords, along with those of other stakeholders, have been considered carefully and certain changes have been made to take account of the feedback received.

My Lords, I thank the Minister for his introduction of these measures. We are all very grateful for the efforts undertaken by the Insolvency Service and the Minister to deal with this issue, and for our interaction. I hope that he will take my comments and those of others constructively.

We share the view that pre-packs play a useful role, but the core issue is how to deal with abuses. At its simplest, we are most grateful to the Minister for the assurance that we will now be looking at this as a mandatory procedure. This has been the critical change which now provides the opportunity to cleanse the process of pre-pack administrations. We could have achieved the same objective with the Pre Pack Pool—I am not compelled by the issues that were outside it—but that has passed and we now must deal with the realities of the arrangements that have been suggested, particularly how effective they are.

I worry about the effectiveness of these regulations. We are not in the same situation as that with the monitors. I have tried for one business to get a monitor, using the existing legislation, and it is quite a difficult process. The compulsion of making this mandatory will certainly create a different incentive, which is important. However, some of the changes made after the consultation are currently insufficient to make this work as effectively as possible or to deal with all the potential abuses. I would be grateful for the Minister’s thoughts on these issues. It is important to acknowledge that the ability of a connected person to opinion-shop has been curtailed from the original proposals, but the Minister is yet to address the issues whereby someone gets something which is not a full opinion. It is advice, it is guidance, it is other things which contribute to making a pre-pack to a connected party that may be problematic, without informally becoming a full opinion. Such things are still excluded. It would be very useful if they were carried within the ambit of this to ensure that opinion-shopping was fully transparent and that those things which were not meeting the full test of an opinion were also included.

My Lords, I thank my noble friend the Minister for his explanation of these regulations, and for his courtesy and that of officials in meeting some of us to explain how thinking in this important area was developing. It is a particular pleasure to follow the noble Lord, Lord Mendelsohn, with his extensive practical experience.

One of the problems with insolvency law is that it is monumentally complex. I know this because I am a chartered company secretary and passed papers which tested me on the law in this area. The course taught me helpful and important lessons about a director’s duties if a company was heading anywhere near insolvency. However, I confess that I do not fully understand all the minutiae of the law and I suspect that I am not alone in this.

Nevertheless, we are where we are, and I thank the Minister for recognising that pre-packs can have value: business is not interrupted, jobs may be saved and a good brand safeguarded, although conflicts have to be watched very carefully. This inherent benefit influenced the Graham report on the future of pre-packs in 2015. I have a lot of time for the common-sense expertise of Teresa Graham. She favoured a voluntary approach with a reserve power, so it is a little disappointing that the Government have now found it necessary to legislate, difficult though this is. The Minister has explained why he thinks this is needed.

A very important Graham recommendation was that there should be a Pre Pack Pool of experienced business people where, on a voluntary basis, details of a proposed sale to a connected party could be disclosed to an independent person prior to the sale taking place, thus giving greater confidence to creditors that the deal had undergone independent scrutiny. This pool has apparently not been much used and that is one of the reasons the Government have moved to a statutory system, with all pre-pack administration sales to a connected purchaser requiring an independent opinion from an evaluator on the sale.

My Lords, it is a great pleasure to follow the noble Baroness, Lady Neville-Rolfe. It was her amendment to the Corporate Insolvency and Governance Bill that allowed these welcome regulations to be tabled. During the debates on the Bill, I expressed some doubts that the Government would address the concern around connected party pre-packs, so I am delighted to be proved wrong and that the Government listened to the concerns that were raised. I am very grateful to the Minister for the time he has made available to discuss the regulations and to Paul Bannister and his team at the Insolvency Service; they have been very generous with their time and very helpful and open in their approach.

These regulations are very welcome and should help to improve the transparency around pre-pack disposals to connected persons. That said, a number of concerns remain. There are three matters that I want to raise, a couple of which have already been referred by the noble Lord, Lord Mendelsohn. First, the regulations do not prescribe any formal qualifications to become an evaluator. An evaluator has only to satisfy themselves and the administrator that they have sufficient relevant knowledge and experience, and must have professional indemnity insurance. I understand the reasons for this approach, which was, in part, to allow members of the pre-pack pool to continue to act as evaluators. The Government may have found an appropriate balance here, but I urge the Minister to keep this under review and to take action to strengthen the qualification requirements if it appears that underqualified people are taking advantage of the rather vague rule.

Secondly, there is opinion shopping, to which the Minister referred. This is when a connected person seeks reports from more than one evaluator but makes only the most favourable report available to the administrator. As the Minister said, the regulations have tried to address this risk by requiring that if the evaluator becomes aware that the connected person has obtained a previous report or comes to believe that the connected person may have obtained a previous report, they must include details of that report or if they have not been given it they must explain why and what steps they took to obtain it. However, the onus lies with the evaluator to find any previous report. If the connected person is not open about it, there is little the evaluator can do.

My Lords, I too am grateful to the Minister for his, as usual, helpful introduction. Like him, I fear that we will be facing many more insolvencies—not just because of the pandemic, as he indicated, but as a result of the many problems arising from Brexit—so these regulations are timely.

I will confine myself to a few questions, which I hope the Minister can respond to in his reply. First, can he tell us whether all kinds of companies are covered by this provision? I understand from the Explanatory Memorandum that it extends to small businesses but are all types of businesses included? Specifically, will football clubs, some of which are currently in great financial difficulties, be included? As others have done, I also want to ask about the evaluators, who will be given significant responsibilities. As their trade body R3—as well as noble Lords in this debate—has said, it would be helpful to know what qualifications will be required to act as an evaluator. The Minister gave us some examples of professions but he did not describe what specific qualifications they should have. If, for example, they are businesspeople, will they be excluded if they have themselves been involved previously in an insolvency?

How will they all be assessed for honesty and integrity prior to their appointment? Why will there not be a central register of evaluators, or indeed a body responsible for any training and registration and checking their operational effectiveness and reliability? Will the Government consider a register of approved evaluators being maintained by the Insolvency Service, as suggested by R3? However well qualified, an evaluator will not have the final say. If an administrator does not accept the decision of an evaluator that the “case is not made”, all he has to do is “provide an explanation” to allow him to proceed anyway. Does this not make the evaluator’s role effectively impotent?

My Lords, I have been tracking pre-packs and the complications thereof for many years. I begin by adding to those of other noble Lords my thanks to my noble friend the Minister and, in particular, to Paul Bannister and the Insolvency Service, for the time they have given to many of us and the changes that have been made, which are certainly welcome.

Before I turn to the substance of the debate, I want to take one of my five minutes to address the Whip on duty. As I have already noted, I have a long-standing interest in this issue. I was in a business meeting in Stoke on Thursday afternoon when I received a call from the noble Lord, Lord Mendelsohn, to tell me that the debate had been tabled for today and that the speakers’ list would close at 6 pm that evening. I was grateful to the noble Lord but horrified to find out he was correct. My Whip for the week arrived at 15.49 on Thursday, so, with a closing time of 18.00, I had precisely two hours and 11 minutes to read my email and put my name down to speak. I am afraid I have to say to the Whip on duty that that is not good enough. I would like them to take the matter up with the Chief Whip and to inquire how this happened and what will be done to prevent it happening again. If I do not get a reply, I certainly do not intend to let the matter rest.

I once again make it clear that, like other noble Lords, I do not oppose the principle of pre-packs. They are a very useful tool in the insolvency practitioner’s armoury but, as we have said many times, in the hands of the unscrupulous they can too easily turn into a fraud on the creditors. The history of the Government’s approach to pre-packs is of two steps forward followed by one step back. They have never quite been able to nail the issue down once and for all. In part, that is the story today: they do not quite close the door on the ruthless.

My Lords, on balance this statutory instrument seems to be an improvement worth supporting, although I am sure the caveats put very clearly and eloquently by my noble friend Lord Mandelson and the noble Baroness, Lady Neville-Rolfe, will have attracted the Minister’s keen ear as things move on. I endorse the core points and arguments that they made and bow to their superior knowledge on the detail. I am sure the Minister will have been as persuaded as I was by their arguments.

I come back to the topic of the football industry. There are some interesting aspects in the detail, particularly the period of eight weeks in relation to the football industry. Something that has happened a lot over recent years is that, in order to fit with the rules in England whereby clubs have points deducted and are potentially relegated, there is a tendency for clubs to go into administration at the very end of the football season. Some suggest rather cynically that that is sometimes calculated on whether the points deduction will have a specific financial impact on the following season.

Football has another oddity, which is that for a long time now a club has been allowed its own preferential football creditors. HMRC lost its court case with Exeter City over this in 2012. Given the way that the football industry and its income streams work, there is a period between seasons—sometimes of 12 weeks but sometimes as low as 10 weeks—when clubs tend to be bought and sold. Does the Minister intend at any stage to look at the implications of the loss of that court case, and what it means for the industry and the stakeholders?

One thing that has happened repeatedly, particularly when one goes down the food chain into lower league and so-called non-league football, is that individual traders—for example, the joiner, the plumber or the printer—lose out on money when everyone else seems to be getting whatever money is around. Yet these are precisely the people who are most crucial, while living on very small margins. It can be the cleaner, the window-cleaner or the grasscutter who loses out, and it often is in this situation. Will the Minister take a closer look at this industry in the next year, the rules that it applies and some of the imagination that could benefit government?

My Lords, other noble Lords speaking in this debate have more extensive knowledge of the history behind these regulations. Although, like many members of the public, I might have spotted a sale of a business to a connected person and wondered whether it was wholly fair, I became engaged with this only relatively recently: when the opportunity presented itself during the passage of the Corporate Insolvency and Governance Act and the noble Baroness, Lady Neville-Rolfe, revived the issue from the Small Business, Enterprise and Employment Act. Since then the noble Lord, Lord Hodgson, has kept an eagle eye on it. He has been keeping our impromptu group of CIG veterans informed since then.

In addition to the persistence of the noble Lord, Lord Hodgson, our little cross-party group has benefited from the varied professional expertise of the noble Lords the Minister referenced, and the noble Lords, Lord Mendelsohn and Lord Vaux, and the noble Baroness, Lady Neville-Rolfe, have ably demonstrated that in their contributions today. Like them, I am pleased that we have got to where we are, but I agree that this may be part of a continuing journey. I also thank the Minister for meetings and bringing forward these regulations. It is a quirk of the speaking order that I get to speak after those other noble Lords, which leaves everything already well covered.

These regulations introduce a new requirement for an opinion by an evaluator to say whether a sale to a connected party is “reasonable” in all the circumstances. This requirement will come into play frequently. As quoted in Accountancy Age last October, Blair Nimmo, the head of restructuring at KPMG, said:

“When a company goes into insolvency and you need to have a fairly quick sale of the business, the person(s) with the most knowledge of a business and its operation are the existing directors. They are the most likely people to have arranged the pre-pack or at least be part of it, even if it is being funded or orchestrated by an independent party. Scenarios whereby there are zero connections to the previous directors are fairly few.”