We fear that the evaluator’s role and required qualities will only really become known as a result of Court and regulatory action against those who are found to have failed to meet the required standard. In theory, Bill’s 19 year old youngest daughter who is at university studying a vocal performance degree can be an evaluator, as long as she can show the administrator that she has “sufficient relevant knowledge and experience to make a qualifying report” (Regulation 6(2)), has no conflict of interest (Regulation 12(1)), has adequate PI insurance (Regulation 11(1)), and as long as she is not associated to the administrator or connected with a company to which the administrator is connected (Regulation 13(1)). The requisite knowledge and experience are not specified, but the knowledge and experience that the evaluator claims to have must be disclosed in the report.
Regulation 10(a) says 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”. We are not sure how the Courts and regulators will view that, but we are amazed that such wording has been allowed in statute. It is saying that you are qualified to do something simply because you are happy that you are. Now, it may be acceptable for life coaches and Olympians to pursue their ultimate goals through the power of positive thinking, but no amount of belief is going to change the fact that a New Zealand Sheep farmer knows nothing at all about aerospace engineering supplies. And yet, under the Regulations, that farmer can pronounce on the sale of one of BAe’s suppliers to its connected management, as long as he is happy that he knows enough! We are being a bit unfair, as the Regulations also require the administrator to be happy with the evaluator’s knowledge and experience, but which standard should the administrator use? Should they stand back and see that the farmer’s opinion is unfounded and that they do not know enough, or should they look at the wording of the Regulations and see that all the farmer need to do is to “be satisfied” that they have enough knowledge and experience.
Regulation 12 essentially says that as the evaluator you have to be independent. The wording goes beyond the “acceptable ethical threats” barrier set down in the ethical code, which would already be an issue for an IP that wanted to be an evaluator. Independence is always tricky to show, unless you can completely exclude any and all connections. Can anyone in the same industry as that of the business being sold, but who would probably have the best knowledge of the business and its likely value to a competitor, ever be independent? Can a valuer, quantity surveyor, or similarly qualified professional (like an IP), be independent if they regularly deal with banks and insolvency professionals? We acknowledge that an independent view will be more acceptable to those who are suspicious of connected party pre-packs, but that reduces the pool of those with enough knowledge and experience to really evaluate the deal. Even then, we think that a creditor or competitor that believes that pre-packs are wrong will hardly be swayed by a view from an IP or fellow professional who they consider to be “in cahoots” with the directors and the administrator.
Regulation 13 should not be a problem, as it sets down the same sort of prohibitions that would stop someone being an IP, such as criminal convictions, disqualification, mental capacity, etc. If they are in breach any of those, an IP would be in a lot more trouble than just missing a business opportunity to comment on a pre-pack.
If you ignore the fact that the Regulations say that the evaluator just has to be satisfied that they know enough, then whether someone will have the requisite knowledge and experience will depend on the deal being offered and the companies involved. Probably the biggest risk is shown by cases like ARY Digital, where an IP approved a sale in circumstances where he did not know enough about the value of the business and subsequently got ordered to pay over three quarters of a million pounds. If that were a connected party pre-pack under the new Regulations, I would expect that the evaluator’s PI and that of the administrator would be expected to share the hit. An IP who wanted to be an evaluator would be likely to have a lot more experience of insolvency procedures than most, but there has to be significant doubt over whether they would have relevant knowledge of the particular industry that any given administration relates to. Since the evaluator only has to be happy that they know enough, they might accept anything. That is one of the weaknesses of this appalling piece of legislation. The administrator will have to at least give a cursory glance to the evaluator’s experience, knowledge and qualifications, but if they have any sense they should try to look for someone who has a detailed knowledge and understanding of the industry concerned.
The problem with the knowledge and experience requirement is that it is likely to clash with the independence requirement. The more someone knows about the business and asset values involved, the more they run the risk that they are not independent. The same independence requirement may also cause problems for any IP seeking to take on the evaluator role, and we think that it would also be a factor should any of the insolvency industry professionals, such as regulators, compliance consultants, or training providers seek to offer such a service. In the detail of Regulation 12, it states that an individual is not independent if they “know or have reason to believe that they have a conflict of interest with respect to the substantial disposal”, where conflict of interest is defined as “…a financial or other interest which is likely to affect prejudicially the independence of the individual in providing a report…”. The same Regulation also says that this is not designed to limit any profession or regulatory requirements, which would include the insolvency ethical code. For an IP to take on an evaluator role, they would have to be certain that not only do they not have a financial or other interest that might affect their view, but also that there is no prior relationship that creates ethical threats that might impair their objectivity. Under the ethical code, of course, that includes any perceived ethical threats, not just the actual threats. We could not, therefore, pass comment on deals proposed by any of our clients, past clients, and possibly even those that we have had significant interaction with over the years, such as ex-regulators or ex-trade body officials. In a small, specialised business, we probably have too many connections to be really sure that someone would not perceive a relationship that could cloud our objectivity. Although we are very careful to review cases objectively to help our clients improve, it would be harder to convince a hostile creditor that we were not influenced by someone we had a few beers with at SPG a decade ago.
So, if you are asked to be an evaluator, bearing in mind that timing is usually pretty tight in such cases, you will have to conduct deep enough ethical checks to be sure that there are no relationships that will have, or could be perceived to have, an impact on your objectivity. As a grumpy creditor or competitor who does not want the directors to be able to start up again on the cheap, my first thought is that you are an IP, so you must be sticking up for your IP mates. If I can also find that you have dealt with the bank, lawyers, or agents connected to the case in the last couple of years, I am going to scream about that as well. If I have 30 years’ experience in the same business as the failed company and I know what every nut and bolt in the business could be worth, I am also going to allege that as a “mere” company undertaker, you don’t know enough about what you are reading to evaluate the deal. Obviously, I am being unfair and I may lose at Court or in a regulatory complaint, but the more trouble I cause you, the more bad publicity the new business gets and the more I gain a commercial advantage. The fact that I can also cause a lot of extra costs for the IPs that I think colluded to get the deal through just makes me happier.
Obviously, there are actually a lot of benefits in having an IP or someone from the insolvency profession involved in the evaluation. The experience of insolvency processes is a significant advantage that in many cases could balance out gaps in specific knowledge of the business, especially where those gaps can be plugged by relying on other specialist support from agents, quantity surveyors, etc. Similarly, you can fight back on the ethical points if your only connection with the bank was that it has been a creditor, along with other financial institutions, in a range of other appointments that you have held over the years. Big firm IPs may struggle with that a bit more if they are on the same bank’s panel or they have staff working on secondment there, but they will probably argue that they are better evaluators just because they are big firm IPs and used to bigger deals!
Other commentators have mentioned further potential problems caused by the report being commissioned by the purchaser and based on incomplete information, so to be honest, we can only see risk at the moment. Until we know what the reward is, we cannot be sure whether the benefit will outweigh the risk. We would be surprised if the fees for such work made it worthwhile, as by definition, the more that someone is paid for their opinion, the more they are likely to compromise their independence to secure the fee. The only thing we are sure of is that the Regulations will not only fail to enhance the reputation of connected party pre-packs outside the profession, but they will also undermine the already fragile faith of the insolvency profession in the ability of Parliament to pass meaningful and useful legislation.
