‘Pre-Pack’ Administration Changes Proposed

A ‘pre-pack’ is a legal process where the business and assets of a struggling company are sold immediately after it is placed into administration. As the name suggests the deal is agreed beforehand meaning that unsecured creditors (including landlords) are not given the opportunity to object.

Pre-packs are now popular as they allow the business to continue without the unprofitable parts or a heavy debt burden and can save jobs. They have also been controversial where they allow failed companies to be sold back to the existing management team or related parties, creating so called ‘phoenix’ companies.

This is why Edward Davey, the Government Minister responsible for insolvency has proposed changes to improve ‘transparency and confidence’ in the process. One of these changes is a new 3 day notice period where the sale is to ‘connected parties’. In theory this would allow unsecured creditors the right to object or put forward a higher offer. However, the prospects of an alternative offer being put forward in such a short time frame seem slim and obtaining an injunction is a costly exercise. Instead individual creditors may use this as a tactic to negotiate themselves a better deal but whether this would benefit creditors as a whole is debatable. In addition extra obligations would be placed on the Insolvency Practitioner dealing with the administration to include a statement that the sale price represents the best available.

As a property lawyer I have often experienced the effects of administration from the point of view of commercial landlord clients. When a company goes into administration the landlord is unable to terminate the lease without the consent of the court or administrator. The landlord can therefore do nothing if a 3rd party is allowed into occupation without the consent required under the Lease or if the property is left vacant. The Landlord is then left to argue whether rent should be payable as an expense of the administration and to potentially find a new tenant.

My advice for commercial landlords is to ensure that sufficient security for payment of rent is requested at the outset. The most popular forms are director/parent company guarantees, rent deposits and Bank security. It is also prudent to look out for the warning signs of impending insolvency such as persistent late payments of rent.

I would be interested to hear your views and whether you think the proposed changes to pre-pack administrations are welcome? 

Gary Cousins