Expert View THE USE OF
EVALUATORS IN PRE-PACKS
by Ella Holden Insolvency and commercial litigation solicitor, Farleys
A pre-pack administration sale is an arrangement whereby the sale of all or part of a company or company’s assets is negotiated and agreed before it enters administration and an insolvency practitioner is appointed as administrator. Upon, or shortly following administration, the sale is actioned.
Pre-packs have been criticised as offering an opportunity for owners to buy back a business free of bad debts by selling to “connected individuals” such as directors, generally at the expense of creditors.
New regulations implemented in 2021 sought to address these concerns by preventing an administrator from making a “substantial disposal” to a connected person within eight weeks of the commencement of the administration without either the approval of the company’s creditors or a report from an “evaluator”: The evaluator being a newly defined role in the process.
The evaluator’s role is to assess the amount,
Oliver Collinge is an insolvency practitioner based in the North of England. He says: “For struggling businesses, it’s not too late to begin negotiations with landlords and creditors to develop manageable repayment plans.
“Will revenues be high enough to support your cost base? Will cash flows be sufficient to deal with the additional debt burden, both formal and informal, that has accrued during Covid?
“Perhaps a CVA is something which should be considered or, where you may need to take the difficult decision to make redundancies to survive, consider applying for government funding to meet the short-term cash impact of this.”
Rosalind Hilton, insolvency practitioner at Blackpool based Adcroft Hilton, says: “Any restructuring has three things in its foundation: early intervention, realistic and achievable targets, and a good understanding of the company’s financials.”
She adds: “Too often, directors spend months firefighting, robbing Peter to pay Paul before asking for help.”
This can mean that many payments have been missed and that creditors chasing payment have been fobbed off with repeated promises of payment ‘next week’.
Rosalind says: “If these promises aren’t kept, then creditors quickly lose trust in the business. As a result, they are unlikely to believe that the company will deliver on the future promises of a restructuring. If directors have lost credibility by breaking promises or failing to deliver, it is difficult for a business to recover.”
extent, or value of the business and assets to be sold and to provide a report which will set out the evaluator’s experience, identify the property that will be the subject of the sale and the consideration to be paid for it.
The evaluator ultimately needs to confirm that they are satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances.
As an extra protection, the connected person should obtain the administrator’s consent to its choice of evaluator, and the administrator should have oversight of the information provided to the evaluator.
Choosing an evaluator should not be left until last minute and they should be given appropriate time to be provided with all information and to produce the report. The cost of, and time required to produce the report varies from evaluator to evaluator so looking around can result in best value for the client.
The second issue is being realistic about what is achievable. Directors can be keen to put difficulties behind them and as a result can be over optimistic about future trading.
Rosalind adds: “If cashflow has been poor for a while, there is no point making an offer based on a swift change in fortune. It can be difficult for directors to assess how long it will take for changes to take effect.
“Another key consideration is the directors’ understanding of the financials. If they don’t have a full grasp of the numbers and what they mean, professional support is essential.
“Ironically, incurring additional fees to have monthly or quarterly management accounts prepared can help directors focus on what is or what is not working and ultimately improve profitability.”
Whatever route is taken will be difficult. Ian McCulloch says: “Entrepreneurs tend to be good at creating and growing businesses, not dismantling them.
“Expecting them to junk product or service lines and turn away potential sales because they are too marginal or there is insufficient working capital is a tough ask.
“Sacrificing their sacred cows rarely comes easily. Management bandwidth isn’t infinite and rarely stretches to major projects like this.
“This is why it is vital to bring on board and work alongside tough, seasoned restructuring experts, who understand the art of the possible.”
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LEGAL VIEW
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