A pre-pack sale takes place when the sale of all or a substantial part of a company’s business is arranged prior to it entering administration, and then completed by the administrator after they are appointed, usually on day one of the administration. It remains a controversial process; for landlords, especially when a tenant company transfers its business and assets to a connected party, like a director or shareholder, leaving behind unwanted debts and liabilities.
Previous attempts at reform
As long ago as 2012, the coalition government announced plans to introduce a “cooling off” period for creditors to object to a pre-pack sale before it was completed, but these were subsequently abandoned.
In 2014, responding to mounting concerns about pre-pack administrations, the government commissioned an independent review led by the now Dame Teresa Graham CBE. This recommended the establishment of a group of experienced business people which could be approached by connected party purchasers to offer an independent opinion on any pre-pack sale.
The following year, a set of voluntary industry measures was introduced to address the perceived lack of transparency and trust in the process, and the Pre-Pack Pool (the Pool) was formed to provide independent opinions. To encourage compliance, the government inserted a “sunset clause” in the Insolvency Act 1986 giving it the power to ban or regulate pre-pack sales to connected parties within the next five years.
The number of connected party pre-packs increased year on year from 163 in 2016 to 260 in 2019. However, there was no corresponding rise in the number of referrals to the Pool, which fell in the same period from 36 (22%) in 2016 to just 23 (9%) in 2019.
The main reason for this is that administrators have no ability to request an independent opinion from the Pool, so referrals are entirely dependent on potential purchasers and they often see no benefit in making one. Further, administrators are only required to make connected party purchasers aware of their ability to approach the Pool; they are not required to recommend that the Pool be approached.
Precursor to the new rules
When the sunset clause expired in May 2020 many thought it was the end for pre-pack reform. However, the clause was revived by this year’s Corporate Insolvency and Governance Act and
extended to June 2021.
Following a review, the Insolvency Service has now concluded that connected party pre-packs remain a cause for concern and there is still a perception that they are not always in the best interests of creditors. In over a third of the cases reviewed, the business was sold for less than market value,
and two thirds of those were at least 25% less than market value. There is, in the government’s words, “still room for further transparency”.
It was also recognised that more companies may become insolvent as a result of the COVID-19 pandemic. Indeed, since the start of the pandemic, we have seen pre-pack sales by major brands
in both the retail and leisure sectors. This gives rise to concerns about the need to protect the interests of creditors as well as promote company rescue, and the Insolvency Service has concluded that further regulation is justified to ensure that pre-pack sales are subject to a measure of independent scrutiny.
In light of this, stakeholders including insolvency industry trade body R3 and the British Property Federation (BPF) supported the establishment of a statutory mechanism for making referral to the Pool mandatory.
Predicting the future
In a recently published report, the Insolvency Service announced that it will bring regulations into force preventing an administrator from disposing of company property to a connected party within the first eight weeks of the administration without either the approval of the creditors or an independent written opinion. The opinion provider, who must meet certain eligibility requirements, must state that either the case is made for the disposal or not made. A copy of the opinion will be provided to creditors and Companies House.
This will no doubt be welcome news for landlords, who may feel that the government’s response so far to COVID-19 has been decidedly debtor friendly and undermined their interests as creditors. Although referrals need not be made to the Pool specifically, as the established operator in the market, it will be expecting a large influx of new cases. Some may, however, ask whether the reforms go far enough.
An administrator can still proceed with a disposal even if the case is not made, although the administrator will be required to provide a statement setting out the reasons for doing so. The government clearly does not want to ban connected party pre-pack sales altogether, as in many cases they are seen as providing the best outcome for creditors, but if this is abused or over-used then banning connected party pre-packs without a “case is made” opinion must be a possible option.
In addition to pre-packs, the BPF has previously called upon government to conduct an urgent review of company voluntary arrangements (CVAs), recommending that the Pool’s remit be extended to provide independent opinions on the fairness of CVA proposals. It remains to be seen whether government will take up that suggestion to tackle what has become an equally controversial insolvency process.
An earlier version of this article appeared in Estates Gazette.
Authored by Mathew Ditchburn