At a time where multiple headwinds, including the highest inflation in over 40 years, challenging energy prices, rising interest rates and supply chain disruption, are having a real impact on businesses (large and small), a company can find itself in financial distress with very little runway to craft and implement a restructuring solution. With increased volatility in the financial markets, refinancing or other forms of financial restructuring may be untenable, with a sale of the business and assets of a company being the only viable solution. Pre-pack administration sales have continued to be a steadfast mechanism for selling a distressed business whilst preserving the value of critical assets like brand and goodwill. That said, the transparency of pre-packs (or lack of) have been much criticised, which has led to tighter regulation, particularly around connected party transactions and marketing processes. Stakeholders must also ensure that the desire to achieve a sale within a tight timescale, often driven by a liquidity runway, does not lead to inadvertent failure to manage and plan for the more unusual issues that may arise. Recent developments in three areas could have significant impact on transaction timetabling.
Administration is a qualifying insolvency event for the purposes of entry into the Pension Protection Fund (“PPF”) and therefore where an administration is on the horizon for an employer with a defined benefit pension scheme, early engagement with the PPF and the pension trustees should be included in the planning process.
Where a pre-pack sale is being pursued and the defined benefit scheme is a significant or the largest creditor, the PPF can exert considerable power and can even look to appoint an alternative insolvency practitioner if they are not satisfied with the sales process conducted by the prospective administrator. The timing of the sale can also come under scrutiny where for example, the pre-pack is executed shortly before a significant pension contribution is due to be made. The Pensions Regulator continues to be a key stakeholder with whom to engage, particularly with the introduction of extensive powers in the Pension Schemes Act 2021 enabling The Pensions Regulator to seek financial contribution where a scheme employer is a party to acts that materially reduce the value of assets of the employer company.1
Ensuring each relevant stakeholder’s position is given due care and consideration with as early engagement as possible is key. Equally, ensuring that parties to a pre-pack administration sale have taken specialist advice and have contemporaneous and detailed records of the decisions leading to a sale are essential to ward off any later risk of transaction challenge that, for example, the pre-pack process resulted in huge liabilities being left with the PPF. The new offences are broad and criminal in nature and could potentially apply to lenders, advisers or business purchasers. Whilst there is a carve out for insolvency practitioners, it is unlikely to cover the period prior to appointment when the negotiations for a pre-pack take place and the advice given to the distressed company. The new legislation will likely make stakeholders more focussed on pension issues, thereby potentially extending transaction timetables.
National Security and Investment Act 2021
The National Security and Investment Act 2021 (“NS&I”) applies to specific categories of transaction* involving the acquisition of or control over certain qualifying entities. Trigger events would include the acquisition of shares exceeding certain thresholds and, whilst the legislation is in its infancy with limited precedent, asset sales should also be interrogated and voluntary notification considered for certainty. The purpose of the legislation is to protect UK national security - mandatory notification and seeking approval from the Secretary of State for Business, Energy and Industrial Strategy (“SoS”) to proceed with a transaction is required prior to completing the transaction, where the ‘target’ entity operates in one of 17 sensitive sectors detailed in the NS&I.2 Failure to notify would render the transaction void and of no legal effect (albeit retrospective validation is available) with the possibility of the acquirer facing civil / criminal penalties. The voluntary notification process is available where the transactions (prior to or after completion) where there is a reasonable suspicion that the transaction has given or will give rise to a national security risk, voluntary notification may be advisable.
Whilst the appointment of administrators over a qualifying entity is outside the scope of the notification regime the subsequent realisation of assets by a company in administration (including by way of a pre-pack administration sale) does not benefit from any exemption.
It is therefore in all parties’ interests to give early consideration as to whether the NS&I applies and where authorisation is required, the impact on transaction timetabling. Whilst for mandatory notification, it is for the purchaser to obtain pre-approval, given the repercussions, any administrator will want to be comfortable that the NS&I has been appropriately considered.
Economic Crime (Transparency and Enforcement) Act 2022
The Economic Crime (Transparency and Enforcement) Act 2022 (“ECA”) introduced the Register of Overseas Entities (“ROE”) at Companies House and certain land registration requirements for overseas property owners. In simple terms, an overseas entity (being a legal entity incorporated outside of the UK) who owns certain UK property (being a freehold property or lease of over 7 years) and became the registered owner on or after 1 January 1999 must apply to Companies House to be placed on the ROE and obtain an Overseas Entity ID (“OEI”) by 31 January 2023. An overseas entity acquiring property cannot apply to His Majesty’s Land Registry (“HMLR”) to register its purchase until it has completed the ROE registration and received an OEI.
Aside from impacting a transaction timetable, significant penalties can arise for failure to comply with ROE registration requirements. Practically, to ensure compliance, the amended Land Registration Act 2002 (“LRA”) requires HMLR to place a restriction on the title registers of relevant property owned by overseas entities which notes that after 31 January 2023 no disposition of that property can take place unless the ROE requirements are satisfied. An OEI, which is valid at the time of disposition, will need to be disclosed to HMLR in order to have the restriction lifted and the acquisition of such property registered.
The LRA (as amended) does provide a potentially important insolvency exemption which could be relevant to future pre-pack administration sales (where English law administrators are appointed to overseas seller entities). Dispositions shall not be prohibited where “the disposition is made by a specified insolvency practitioner in specified circumstances”. The LRA notes that the meaning of “specified circumstances” and “specified insolvency practitioner” is to be established by regulations made by the SoS which have not yet been issued. If administration sales are captured by these exemptions, and a tight timetable prevents the seller company from obtaining an OEI, a purchaser of property from an overseas entity in administration may take comfort that their acquisition will subsequently be registered despite non-compliance with the ROE process and in the absence of an OEI.
That said, where ROE requirements can be fulfilled efficiently, and certainly during this period of uncertainty where regulations are awaited, purchasers and prospective administrators will need to accommodate this additional procedure into their planning process as an OEI is likely to be a completion deliverable.
The above topics are by no means the only features that can arise in pre-pack administration sales which may impact timing, for example, following Brexit, delays in deal timetables may arise where overseas assets are to be sold where automatic recognition is no longer available. As relatively new regimes, with less established practices, parties’ approach to all of these topics should be debated now given the expected rise in distressed sales.
1 Pensions Schemes Act 2021 criminal offences: Conduct or actions that prevents recovery of all or part of an employee debt or prevents it becoming due or compromises or settles or reduces the amount of such debt; Conduct or actions that detrimentally affects in a material way the likelihood of accrued scheme benefits being received and you knew (or ought to have known) that the conduct or actions would have that effect and did not have a reasonable excuse; and You fail to comply with a contribution notice.
2 NS&I Sectors: advanced materials; advanced robotics; artificial intelligence; civil nuclear; communications; computing hardware; critical suppliers to government; cryptographic authentication; data infrastructure defence; energy; military and dual-use; quantum technologies; satellite and space technologies; suppliers to the emergency services; synthetic biology; and transport.