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IPs may be liable for misfeasance claim if connected person checks not done properly

By Rupert Darrington, R3 Recovery News

The new rules for whether a proposed purchaser in a pre-pack situation is a connected person are not clear in many cases, and this could open up IPs to misfeasance claims, or a claim for removal, says David Pollard, barrister at Wilberforce Chambers.

According to Pollard, under the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 there can be a breach of statutory requirements even if this is inadvertent, or if “reasonable care” has been taken.

“There is no express sanction for a breach in the legislation, but this could be the source for others on the administrator, for example a misfeasance claim, or a claim for removal,” he said.

“Administrators may seek confirmations of status from relevant parties, for example a prospective purchaser, but this may not be conclusive – and may be tricky to get.”

Pollard, who has recently written a book on the subject, said that “at its extremes, a proposed purchaser company can be a connected person with an insolvent company if there is just one person – perhaps best called a link person – who both is, or was, an associate of the insolvent company or of a director or officer of the company and is, or was, an associate of the purchaser company or of a director or officer of the company.”

According to Pollard, one partial way of checking this is for both sides to prepare a list of their relevant persons – that is their associates and the associates of their directors and officers – and then cross check both lists to see if they have any names in common.

“But often a potential major difficulty here can be not just in identifying the associates of the companies, but also in identifying both the directors (and former directors) and officers (and former officers) of a company and the associates of such persons.”

Pollard said another difficulty is that the definitions of an “associate” are themselves quite wide. “It will often be a practically impossible task for a BidCo, or the administrators of an InsolventCo, to identify all its associates. It can be very difficult for an individual director or officer to confirm all of his or her associates.”

Under the 2021 rules and the coming into force of para 60A of Schedule B1 to the Insolvency Act 1986, if a substantial disposal is envisaged within the first eight weeks of an administration, the parties need to check if the proposed purchaser is a “connected person” with the company in administration. If it is, then the purchaser usually needs to provide a report from an independent evaluator.

The relevant tests for being a connected person is set out in the legislation: para 60A of Schedule B1 to the Insolvency Act 1986, says Pollard. But he adds: “The tests are rather complex and use many other concepts, which themselves can be tricky, such as [the meaning of the words] associate, director, and officer.

“All of this points towards a cautious, but potentially more costly, approach of getting an evaluator’s report in all cases unless Bidco is clearly not connected, or the disposal is clearly outside 8 weeks.”

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