Who Is a Connected Person in a Pre-Pack Administration Sale?
If you are looking to buy a business or assets from a company in administration, one of the first questions to consider is whether you are a connected person.
This matters because where a proposed sale is to a connected person, and the sale involves all or a substantial part of the company’s business or assets within the first eight weeks of administration, an Evaluator Report may be required.
For many directors and purchasers, this can feel technical. In practice, the question is usually straightforward, but it is important to identify it early.
At Admin Eval, we specialise in independent Evaluator Reports for connected-party sales in administration. We help connected purchasers and their advisers understand whether the requirement is likely to apply and what information will be needed.
The quick answer
A connected person is someone who has a close connection with the company entering administration.
In many pre-pack administration sales, this may include:
a current director;
a former director;
a shadow director;
a shareholder;
a person involved in the management of the company;
a company controlled by the same directors or shareholders;
a group company;
a company set up by the existing management team to buy the business or assets.
If the buyer is connected, and the sale is substantial and takes place within the first eight weeks of administration, the connected purchaser may need to obtain an Evaluator Report before completion.
For more detail on when a report is required, read our guide: Do You Need an Evaluator Report for a Pre-Pack Administration?.
Why does connected-person status matter?
Connected-person status matters because the regulations on connected-party sales in administration are designed to provide additional scrutiny where the buyer has a close relationship with the insolvent company.
A sale to a connected person is not automatically wrong.
In many cases, the existing directors or management team may be best placed to preserve value, keep the business trading, protect employees, and maintain customer relationships.
However, because the buyer is connected, creditors may want reassurance that the proposed sale has been reviewed independently and that the price and grounds for the sale are reasonable.
That is where the Evaluator Report process comes in.
What is a connected-party sale?
A connected-party sale is a sale by an administrator to a purchaser who is connected with the company in administration.
This often arises in a pre-pack administration, where a sale is arranged before the administrator is appointed and completed shortly after the appointment.
A typical example might be:
a company is unable to continue trading because of creditor pressure;
the directors seek advice about administration;
a new company is formed by the same or similar directors;
the new company offers to buy the business and assets;
the sale completes shortly after the administrator is appointed.
In that situation, the purchaser is likely to be connected because the people behind the new company are also connected with the old company.
Common examples of connected purchasers
Connected purchasers often include directors, shareholders, management teams or companies controlled by them.
Some common examples are set out below.
1. Existing directors buying the business through a new company
This is one of the most common situations.
The directors of the company entering administration set up a new company, or use another existing company, to buy the business and assets from the administrator.
This may be done to preserve the trade, protect jobs, keep customer relationships in place and continue the viable parts of the business.
Because the directors are connected with the company in administration, the new purchasing company is also likely to be treated as connected.
2. A former director making an offer
A former director may also be connected, depending on the circumstances and timing.
For example, a director who resigned shortly before administration but remains involved in the proposed purchase may still be treated as connected.
This is an area where early advice is important. A resignation does not necessarily remove the connection if the person remains involved in the business or proposed transaction.
3. A shadow director or person involved in management
A person does not always need to be formally registered as a director to be connected.
Someone who has been heavily involved in directing or controlling the company’s affairs may also be relevant.
This could include a person who has significant influence over the company’s decisions, even if they are not listed at Companies House as a director.
Where there is any uncertainty, the position should be explained clearly to the proposed administrator and evaluator.
4. A shareholder or owner purchasing the assets
A shareholder or beneficial owner may be connected, particularly where they have control or significant influence over the company.
This might include an individual shareholder, a corporate shareholder, or another entity within the same ownership structure.
If the purchaser is owned or controlled by the same person or people who own or control the company in administration, connected-person status is likely to be an issue.
5. A company controlled by the same directors or shareholders
The purchaser does not have to be an individual.
A connected purchaser may be another company that is controlled by the same directors, shareholders or management team.
For example:
OldCo enters administration.
NewCo is owned and controlled by the same directors.
NewCo offers to buy the trade and assets from the administrator.
In that situation, NewCo is likely to be treated as connected because of the people behind it.
6. A group company or associated company
A group company may also be connected.
This can include a parent company, subsidiary, sister company or other associated company within the same wider group.
Where a group company buys assets from a company in administration, the connection should be considered carefully, particularly if there are common directors, shareholders or control arrangements.
7. A management buyout team
A management buyout can also involve connected persons.
If members of the existing management team are buying the business or assets, either directly or through a new company, they may be connected depending on their role and influence within the company.
The key question is not just the label given to the transaction. It is the relationship between the buyer and the company entering administration.
Is every director-led purchase a problem?
No.
A director-led purchase is not automatically improper, and it does not mean the sale cannot proceed.
In many cases, a connected purchaser may be the only realistic buyer or the buyer best placed to preserve value quickly.
For example, the existing directors may understand the business, have relationships with customers and suppliers, and be able to fund the transaction quickly.
The purpose of the Evaluator Report requirement is not to prevent connected-party sales. It is to make sure that certain connected-party sales are independently scrutinised before completion.
Does being connected always mean an Evaluator Report is needed?
No.
Being connected is only one part of the test.
An Evaluator Report is usually relevant where:
the purchaser is connected to the company;
the sale involves all or a substantial part of the business or assets;
the sale takes place within the first eight weeks of administration; and
creditor approval is not being obtained before completion.
If the purchaser is connected but the sale is not substantial, or the timing falls outside the relevant period, the Evaluator Report requirement may not apply.
However, where a connected purchaser is buying the business or key assets shortly after administration, the requirement should be considered early.
You can read more about the overall requirement in our article: What Is an Evaluator Report Under ARR 2021?.
How do you explain the connection to the evaluator?
The evaluator will need to understand the connection between the purchaser and the company entering administration.
The purchaser should be ready to explain:
who owns the purchasing entity;
who controls the purchasing entity;
who the directors are;
whether any of those people are directors, former directors or shareholders of the company entering administration;
whether any management team members are involved;
whether there are any family, group or ownership links;
whether the purchaser has been involved in the company’s affairs before administration.
This does not need to be overly complicated, but it should be clear.
If the purchaser is a newly incorporated company, the evaluator will usually need to understand who is behind it and why it was formed.
What documents may help show the connection?
Useful information may include:
Companies House records;
company structure charts;
shareholder information;
director details;
details of former directors;
details of management involvement;
offer letters or heads of terms;
the proposed sale agreement;
a short written explanation of the connection.
In many cases, the explanation can be dealt with in a simple summary.
For more detail on the wider information usually needed for a report, see our guide: What Information Is Needed for an Evaluator Report?.
What if the connection is uncertain?
Sometimes the position is not immediately clear.
For example, there may be questions about:
whether a former director is still connected;
whether a shareholder has sufficient control;
whether a management team member is connected;
whether a group company is connected;
whether family or associated-party links are relevant.
Where there is uncertainty, it is better to raise the issue early.
The proposed administrator, legal advisers and evaluator can then understand the position and decide whether the Evaluator Report requirement should be treated as applying.
Trying to deal with this late in the process can create delay, particularly where a sale is due to complete quickly after the administrator is appointed.
Why early identification matters
Connected-party administration sales often move quickly.
If the connected-person issue is identified late, there may be very little time to instruct an evaluator, gather information and complete the report before the sale timetable is affected.
Early identification helps everyone understand:
whether a report is likely to be needed;
who will instruct the evaluator;
what information is required;
whether valuation evidence is available;
whether any previous report exists;
whether the sale timetable is realistic.
At Admin Eval, we help connected purchasers and advisers deal with these points at the outset so the process can move forward as smoothly as possible.
How Admin Eval helps
Admin Eval provides independent Evaluator Reports for connected-party sales in administration.
We work with directors, connected purchasers, solicitors, accountants and insolvency practitioners to make the process clear, practical and efficient.
Our service includes:
an initial discussion about the proposed sale;
guidance on whether connected-party issues are likely to be relevant;
a clear information request;
review of the proposed transaction;
independent consideration of the proposed sale;
timely preparation of the Evaluator Report.
You can read more about our service on our Evaluator Report services page, or learn more about our experience on the Evaluators page.
Need an Evaluator Report for a connected-party sale?
If you are a director, connected purchaser, solicitor, accountant or adviser involved in a proposed administration sale, we can help you understand the next steps.
Contact Admin Eval for an initial discussion.
Email: enquiries@admineval.co.ukTelephone: 07824 348338
FAQs
Is a director always a connected person?
A current director will usually be connected with the company. If that director, or a company controlled by that director, is buying the business or assets from administration, connected-person status should be considered carefully.
Is a new company connected if it has the same directors?
Usually, yes. If the new company is controlled by the same directors or management behind the company entering administration, it is likely to be treated as connected.
Can a former director be connected?
A former director may still be connected depending on the circumstances. This should be considered carefully, especially if the resignation was recent or the former director remains involved in the proposed purchase.
Does being connected stop the sale from happening?
No. Being connected does not automatically prevent the sale. It may mean that creditor approval or an Evaluator Report is required before the sale can complete.
Who decides whether the purchaser is connected?
The issue should be considered by the purchaser, their advisers and the proposed administrator. Where an Evaluator Report is being obtained, the evaluator will also need to understand the connection as part of the report process.
What should we do if we are unsure?
Raise the issue early. If you are unsure whether the purchaser is connected, you can contact Admin Eval for an initial discussion.
