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Landlords demand pre-pack answers

The country’s biggest retail landlords are pushing for greater clarity from administrators as the Insolvency Service admits that a third of pre-packaged administrations do not comply with its regulations.

A so-called ‘pre-pack’ is a fast-track administration that avoids a failing business being sold on the open market. An insolvency practitioner instead lines up an advance purchaser to take over the profitable parts of the business, with the company going into administration simultaneously.

The British Property Federation (BPF) is launching a pre-pack questionnaire to help get answers for landlords. Administrators are bound by the Insolvency Service, their governing body, to provide the answers which the questionnaire aims to elicit.

Read the Insolvency Service report here: http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/policychange/sip16-final.pdf

Graham Horne, deputy chief executive admitted: “There is still a fair way to go to ensure that creditors receive the information they need in a timely manner. We will be looking to strengthen SIP 16 to ensure it gives creditors what they want.”

The property industry’s pressure follows a spate of high profile pre-packs including Allied Carpets last week and a high profile company voluntary agreement involving JJB Sports in May.

The BPF document, designed by law firm Lovells LLP, gives landlords standard questions for the administrator to help uncover information about the identity of the buyer of the property, their intentions for the property, and whether the insolvent tenant's lease has been re-assigned (without permission) to the buyer.

The answers to these questions will help the landlord understand the state of play with his property or properties and could offer ammunition - in select cases - to challenge the decision to pre-pack.

Ian Fletcher, director of commercial Policy at the BPF said:

“Although landlords support a rescue culture for businesses, concerns have been raised over the limited transparency of the process. Landlords are often caught by surprise by a pre-pack administration and often have limited information on the state of their property, which is generally one of the biggest assets involved in the deals.”

Ronan Faherty, commercial director, Land Securities said:

“A property company's imperative is to see his customers survive and we support a rescue culture for companies in financial difficulties. However, following a pre-pack administration a property company is often in the grim position of knowing little about the intentions of the new occupier of his properties. Uncertainty is generally bad for any business and in this instance can harm other retailers in an existing scheme. This questionnaire will assist us in gaining clarity to make informed business decisions, which will ultimately benefit the whole industry.”

Duncan Grubb, head of credit control at Hammerson, said:

“This information will help to ensure that in each case a pre pack administration represents the best outcome for both the distressed company and its creditors, of whom landlords often form a significant part.”

Tim Reid, senior associate (real estate) at Lovells, said:

“Pre-packs are not intrinsically a bad thing. However, when a tenant unexpectedly enters administration and transfers its business and property to a new company, the landlord is entitled to demand from the administrators enough information to help him protect his interests, both legally and commercially.

“The Insolvency Service has pledged to monitor closely the way that insolvency practitioners respond to SIP16. A copy of the BPF questionnaire should therefore grab every pre-pack administrator's attention, and provide landlords with the level of disclosure and transparency to which they are entitled.”

Peter Sargent, president of R3, the trade body for insolvency practitioners, said:

"The Insolvency Service's report on the first six months' operation of SIP 16 shows that 65% of the reports were fully compliant with the disclosure requirements and just 3% were referred to the regulators; therefore demonstrating that there is no systematic abuse of pre-packs. We welcome the BPF's set of questions for landlords, as any tool which helps bring clarity to what is a frequently misunderstood insolvency tool will benefit all parties - the business owners, creditors and IPs alike."

Notes for editors

Pre-pack administrations are a legal form of insolvency proceedings.

Pre-pack administrations are not new. The key piece of legislation bringing about pre-packs is the Enterprise Act 2002.

A pre-packaged administration is a fast-track administration that avoids a failing business being sold on the open market, with all the attendant disturbances. Instead, an insolvency practitioner lines up in advance a purchaser to take over the business, or parts of it, with the company going into administration simultaneously. This method maximises the realisations from the estate as it avoids any loss of value from a deterioration in the goodwill of the firm.

A pre-pack sale of a business is effectively the sale of the ‘good bits’ of the business including all elements of the business that are required to keep the business viable – such as stock, premises, staff, pension pools etc. The ‘bad bits’ of a business – commonly loss making retail stores in the case of property – may be sold off by the administrators and may eventually be categorised as onerous contracts and disclaimed by the liquidator.

The hall mark of a pre-pack administration is speed. The sale of the good parts of a business is immediate following the appointment of an insolvency practitioner (IP) and the transfer of assets into the ‘new co’ includes everything except the leases of properties. These have to be assigned, with the express permission of the landlord.

The Insolvency Service’s report (click here)

• “A significant number of SIP 16 reports failed to live up to full compliance…” (p. 5)

• 370 out of 572 companies in administration were compliant with the requirements of SIP 16 – 65%. (p.5). This is not a very impressive figure, especially as there are likely to be many more IPs who do not report their SIPs to the Insolvency Sevice.

• “There does remain to be significant room for improvement in the information provided in a good proportion of cases…” (p.5)

• 29% of all administrations were pre-pack sales (1 in 4). “This calculation remains the most reliable indicator of the proportion of administrations involving pre-packs’ (p.15)…however could be a 10-20% underestimation of the no. pre-pack sales being undertaken. Higher as there is no requirement for the IP to send a SIP 16 to the Insolvency Service. We would want the SIP 16 regulations to be amended to provide the Secretary of State with information in all cases.

• 81% of all pre-packs were to parties connected with the insolvent company. A lot, but not really relevant to this release. But, “no initial evidence that the level of director mis-conduct in pre-packs is any greater than in any other form of insolvency

For more information and all PR and media queries, please contact Andrew Teacher, Head of Media, on 020 7802 0113/ 07968 124545/ ateacher@bpf.org.uk

Downloads

Insolvency Service Report on SIP 16

British Property Federation SIP 16 Questionnaire