What Counts as a Substantial Disposal in Administration?
If you are proposing to buy a business or assets from a company entering administration, one of the questions you may be asked is whether the transaction amounts to a “substantial disposal.”
That matters because the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 — usually referred to as ARR 2021 — apply where an administrator proposes to make a substantial disposal to a connected person within the first eight weeks of an administration.
For directors and purchasers, the difficulty is that there is no simple monetary threshold or percentage test.
So what actually counts as a substantial disposal?
The quick answer
A substantial disposal is a disposal, sale or hiring out of all or a substantial part of a company’s business or assets to one or more connected persons during the first eight weeks of administration.
It can also include a series of transactions which, taken together, amount to a substantial disposal.
There is no fixed value or percentage which automatically determines whether a sale is substantial.
Instead, the insolvency practitioner must consider the nature and commercial effect of the proposed transaction and decide whether it involves all or a substantial part of the company’s business or assets.
If the transaction is substantial, the purchaser is connected and the sale is taking place within the first eight weeks of administration, the administrator will normally need either:
creditor approval for the transaction; or
a qualifying Evaluator Report obtained by the connected purchaser.
For a broader explanation of the overall test, see our guide to whether you need an Evaluator Report for a pre-pack administration.
Why does “substantial” matter?
ARR 2021 was introduced to provide additional scrutiny of certain sales by administrators to people connected with the insolvent company.
This is particularly relevant to pre-pack administrations where, for example, the existing directors establish a new company to purchase the business and assets immediately following the administrator’s appointment.
Where the regulations apply, an administrator cannot simply complete the substantial disposal to the connected purchaser.
Before doing so, the administrator must either obtain creditor approval or receive and consider a qualifying Evaluator Report obtained by the purchaser.
If you are unsure whether the proposed purchaser is connected, our guide explains who is a connected person in a pre-pack administration sale.
Understanding whether the proposed transaction is substantial is therefore another important part of deciding whether ARR 2021 applies.
Is there a financial threshold?
No.
ARR 2021 does not say that a disposal becomes substantial once it exceeds a particular value.
There is no rule stating that a transaction representing, for example, 25%, 50% or 75% of the company’s assets is automatically substantial.
Similarly, a sale does not fall outside the regulations simply because the purchase price is relatively modest.
The nature of the business and the importance of the assets being transferred also matter.
A relatively low-value transaction could still represent substantially all of the trading operation of a small company.
What factors are considered?
When considering whether a disposal is substantial, relevant factors include:
the value of the business or assets being sold;
how much of the company’s business is being disposed of;
whether the company’s trading style is included;
whether goodwill forms part of the transaction.
The transaction needs to be considered as a whole rather than simply by adding up individual assets.
For example, a sale might include:
goodwill;
stock;
plant and machinery;
intellectual property;
websites and domain names;
customer data;
contracts;
work in progress;
trading names;
equipment or vehicles;
other assets required to continue trading.
The question is not simply how many assets are being bought. It is what the transaction represents commercially.
What about the sale of the whole business?
Where the entire trading business and substantially all of its operating assets are being transferred to a connected purchaser, the position will usually be relatively straightforward.
That is likely to amount to a substantial disposal.
This is common in a traditional connected-party pre-pack administration, where a newly incorporated company purchases the operating business immediately after the administrator’s appointment.
Where that sale is intended to take place within the first eight weeks of administration, ARR 2021 should be considered at an early stage.
If ARR 2021 is unfamiliar, our guide to what an Evaluator Report is under ARR 2021 explains the process and the role of the Evaluator in more detail.
Can the sale of only some assets still be substantial?
Yes.
A transaction does not have to involve every asset owned by the company.
The test is whether all or a substantial part of the business or assets is being disposed of.
For example, a purchaser might acquire the goodwill, trading name, customer relationships and key operating assets while leaving behind surplus equipment or other assets for the administrator to realise separately.
The fact that some assets remain in the administration does not automatically mean that the main transaction is not substantial.
The commercial substance of the transaction needs to be considered.
Can several smaller transactions be treated as one substantial disposal?
Yes.
ARR 2021 specifically allows a substantial disposal to include a disposal effected through a series of transactions.
This means that several commercially linked transfers may need to be considered together rather than individually.
Where multiple transactions together make up one substantial disposal, the Evaluator Report should deal with the disposal as a whole.
What if a secured lender is buying the assets?
Connected-party transactions can take a number of different forms.
A disposal can include circumstances where a connected person holding security over company assets purchases the business or assets in reduction of the debt owed to them.
The structure of the consideration therefore does not necessarily determine whether ARR 2021 applies.
The connection between the purchaser and the company, the assets involved and the overall effect of the transaction still need to be considered.
Who decides whether the disposal is substantial?
Ultimately, this is a matter for the insolvency practitioner dealing with the proposed administration.
The administrator is responsible for establishing whether a proposed disposal is substantial and falls within the scope of ARR 2021.
That is an important distinction for connected purchasers.
The Evaluator’s job is not to decide whether the regulations apply. The Evaluator independently considers the proposed disposal and reaches the opinion required by ARR 2021.
If you are proposing a connected-party purchase, the question of whether the transaction is substantial should therefore be raised with the proposed administrator as early as possible.
What happens if the transaction is a substantial disposal?
If:
the transaction is a substantial disposal;
the purchaser is a connected person;
the disposal takes place within the first eight weeks of administration; and
creditor approval has not been obtained,
the connected purchaser will need to obtain a qualifying Evaluator Report before the administrator can complete the transaction.
The administrator must receive and consider that report before completing the disposal.
The purchaser will then need to provide the Evaluator with information about the company, the purchaser, the assets, the proposed consideration and the rationale for the sale.
Our guide explains what information is needed for an Evaluator Report and how to prepare it.
Does the Evaluator Report have to wait until the company enters administration?
No.
In many cases it is sensible to begin the process before the administrator is formally appointed.
This is particularly important with pre-pack sales, where the intention may be to complete the transaction immediately or very shortly after appointment.
Starting the Evaluator Report process early allows the required information to be identified, reviewed and any gaps addressed before completion becomes urgent.
At Admin Eval, we regularly work with connected purchasers and their professional advisers before the administration appointment so the report can be prepared in line with the proposed transaction timetable.
You can see how our Evaluator Report service works in practice here.
Unsure whether your proposed purchase is substantial?
The starting point should be a discussion with the proposed administrator or your professional adviser, as the insolvency practitioner is responsible for determining whether the proposed disposal falls within ARR 2021.
Where an Evaluator Report is required, Admin Eval can then guide you through the process.
We specialise exclusively in independent Evaluator Reports for connected-party administration sales and typically produce reports within 48 hours once sufficient information has been received.
Contact Admin Eval for an initial discussion.
Email: enquiries@admineval.co.uk
Telephone: 07824 348338
FAQs
Is there a minimum purchase price for a substantial disposal?
No. ARR 2021 does not contain a minimum monetary threshold.
Does more than 50% of the company’s assets have to be sold?
No. There is no statutory percentage test. The transaction needs to be considered as a whole when determining whether it represents all or a substantial part of the company’s business or assets.
Can the sale of goodwill amount to a substantial disposal?
Potentially, yes. Whether the trading style and goodwill form part of the disposal are specifically relevant factors when considering whether a disposal is substantial.
Who decides whether a transaction is substantial?
The insolvency practitioner dealing with the administration is responsible for establishing whether the disposal is substantial and falls within ARR 2021.
Can several sales be considered together?
Yes. A substantial disposal can be effected through a series of transactions.
Do I automatically need an Evaluator Report if the disposal is substantial?
Not necessarily. The purchaser must also be connected and the disposal must take place within the first eight weeks of administration. Creditor approval can also be obtained as an alternative to a qualifying Evaluator Report.
For shorter answers to common questions, visit our Evaluator Report FAQs.
