Johnny Abraham, Managing Director - J9 Advisory
While some regulations need to be strengthened, stronger evaluators have helped to improve the credibility of connected party transactions, says Johnny Abraham.
The last edition of Recovery magazine saw a spotlight shone on connected party pre-packs and the evaluator role that was introduced via the Administration (Restriction on Disposal etc. to Connected Persons) Regulations 2021.
Below I set out some further considerations on two of the key concerns that were raised.
Firstly, as per the headline of the article ‘The lack of definition of the qualifications to be an evaluator is controversial’ (Recovery Autumn 2024, p18). This, I would say, is the most significant area where wording of the regulations needs to be strengthened.
The regulations, as currently drafted, state in regulation 10 that “an evaluator is an individual who is satisfied that their relevant knowledge and experience is sufficient for the purposes of making a qualifying report.” To say that this is vague and open to abuse would be something of a compliment.
The current wording has allowed a number of parties to “window dress” their way into justifying their ability and suitability to meet the “relevant knowledge and experience” criteria. This has led to a number of parties providing evaluator services that simply do not in my opinion meet the implied spirit of the requirements of the regulation.
There are several examples where statements as to qualifications and suitability to act are questionable at best, and misleading at worse. For example, a more generic qualification and role does not provide an individual with knowledge and experience relevant to the very specialist sector that is business recovery and insolvency.
Non-complaint
This is further evidenced by a number of very poor quality reports where, for example, connected parties and purchasing entities are not properly identified, or the transaction value or term are not properly documented and/or do not equate to the transaction that has been completed, which in some cases I would expect could be deemed non-compliant by regulatory bodies when file reviews are completed.
There are also numerous reports that make the misleading statement that “The proposed
administrator, where appointed, has raised no objection to my suitability as an Evaluator.” The reality is that the Proposed Administrator had no idea who the Evaluator was until they received the report and therefore had no ability to object.
These points if unchallenged could leave the evaluator in question, and the IP and connected persons at risk.
Until such time that there is a clearly defined criteria to meet the “relevant knowledge and experience” requirement, connected persons and IPs need to ensure that any evaluator is suitably knowledgeable and experienced, not only to meet the spirit of the regulations as currently worded, but also to evaluate the transaction that is being presented, which can vary from simple and low value, through to highly complex and high value.
In my opinion, to meet the spirit of regulation 10, an evaluator should hold a professional qualification of significant relevance to business rescue and restructuring, and have to maintain an active membership with a relevant regulatory professional body.
In addition to this, they should also have a CV that can demonstrate a minimum amount (for example, 10 years) of hands-on experience within the business rescue and restructuring sector.
Without this qualification and experience, how can someone possibly be tasked with reviewing and giving an opinion on a transaction that is to be completed by highly regulated professionals?
Formal complaints procedure
These suggestions not only provide professional credibility to an evaluator as an individual, but it also ensures that they are a regulated individual, with continuing professional development requirements and professional standards they must abide by, with a formal complaints procedure in place should it be required.
Collectively these suggestions will provide significantly increased accountability for evaluators and significantly diminish the risk of the next point, overfamiliarity.
In his article ‘Same Evaluators ‘guns for hire’ may be leading to over familiarity’( Recovery Autumn 2024, p20), Professor Peter Walton writes: “The ability of those engaged in a connected party pre-pack to choose their own evaluator may be leading to over familiarity with the same guns for hire being approached.”
This makes for an attention-grabbing headline. However, the reality is that some evaluators are regulated professionals with reputations on the line, and IPs are also highly regulated professionals. A number of insolvency firms also have their own internal risk teams that carry out a peer review of each pre-pack transaction, alongside with the qualifying report.
I would say that it is highly unlikely that an evaluator that meets the criteria above, would engage in such behaviour.
Professor Peter Walton writes: “One of the benefits of the Pre-Pack Pool was that those approaching it had no control over the identity of the individual that carried out the evaluation. That independence appears to be lacking under the new system. If tales of the Wild West prove to be based on fact, the 2021 system may need an epilogue where those hiring do not get to choose their evaluator.”
The problem with this statement is, as contained within it, it is based on a tale. Could it be happening? Possibly. Is it likely to be happening on a regular basis? I would not think so. If it is, I would expect that this would be picked up by the regulatory bodies. Is the answer to have a randomly allocated evaluator as Professor Walton is implying? Absolutely not.
External scrutiny
Both the proposed purchaser and proposed administrator need to know that the individual providing the report is suitably knowledgeable and experienced to provide a report for the transaction in question. This therefore needs to take into account the size and complexity of each transaction. The IP, connected persons, and their legal advisors together with other stakeholders also all need to know that the transaction and qualifying report can stand up to external scrutiny.
Being allocated what could transpire to be an unsuitable evaluator could cause unnecessary delays or transactions to fall through, resulting in jobs being lost and creditors being placed in a worse position.
Regulation 12 states “An individual meets the requirement as to independence unless they have, at any time during the period of 12 months ending with the date on which a report is made by that individual for the purpose of satisfying the condition in regulation 3(1)(b) provided advice to, and in respect of, the company or a connected person in relation to the company, (i) in connection with, or in anticipation of, the commencement of an insolvency procedure under parts A1 to 5 of the Act, or (ii) in relation to corporate rescue or restructuring.”
This regulation would appear to prohibit an evaluator from acting for a connected person again within 12 months, and that is how I would interpret it. However, in my opinion, what is not clear is if this is a blanket restriction relating to the connected person (and any entity they are involved in) or if it relates to a specific company. My suggestion would be that this wording needs to be strengthened to ensure it is not misinterpreted.
Small number of key partners
Another point that needs to be acknowledged is that in total, there are only approximately 1250 appointment-taking IPs in the UK. Of those, there will be a significant number of practitioners that only engage in personal insolvency matters or work in small firms that predominantly (if not exclusively) work with small businesses when appointed as liquidators, and will rarely be appointed as an administrators. They would therefore rarely, if ever, have cases that fall subject to the regulations. Large insolvency firms often only have a small number of key partners that take appointments nationally.
When you start to think deeper about the numbers, we operate in a very niche area of highly specialised individuals, which also applies to the number of suitable evaluators available.
The bigger risk, I would say, is that there may be companies that should have been placed into administration and subject to the connected party regulations that are being placed into creditors’ voluntary liquidation instead, in order to avoid the scrutiny that an administration and the regulations would bring.
Outside of my work as an evaluator, I have seen circumstances where businesses have been sold to third parties where the marketing process and value achieved are questionable, or where alternative action could have been taken to enable existing parties to retain their businesses and see creditors repaid.
While some of the regulations need to be strengthened, the evaluator has helped to improve the credibility of connected party transactions, and in some cases I have reviewed, has resulted in increased consideration and strengthened terms for creditors , which can only be seen as a positive development.
The question therefore becomes: 'Should the evaluator role be expanded beyond its current scope?"
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