No special treatment for landlords in review of pre-packs, but “clean-up” recommended

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

On 16 June 2014, the British Government published the findings and recommendations of an independent review into pre-pack administrations (pre-packs), carried out by Teresa Graham CBE. Teresa was Deputy Chair of the Government’s Better Regulation Commission (BRC). She is also immediate past Chair of the Regulatory Board of the RICS.

Instead of an outright ban on pre-packs, which had been sought by some opponents of the technique, Graham wants to see a “clean-up” involving “major improvements on how [pre-packs] are administered”.

She has proposed that this be achieved through a package of six voluntary measures, two of which focus on pre-pack sales to connected party purchasers, which account for almost two thirds of pre-packs. Before entering into a pre-pack, Graham wants connected party purchasers voluntarily to:

• approach a “pre-pack pool” of independent and experienced business people, to obtain an opinion on the proposed pre-pack; and
• complete a “viability review”, stating how the purchaser will survive for at least 12 months from the date of the review and what the purchaser will do differently to the insolvent company to avoid a further failure.

In her report, Graham expressed some sympathy with the position of aggrieved landlords, who had identified cases where:

• the sole objective of the pre-pack appeared to be to restructure the company’s balance sheet to shed unprofitable leased sites; or
• an insolvent administration had been “engineered” through a supposed withdrawal of parent company support.

However, Graham stopped short of making recommendations that would affect the administrations of large, multi-site companies, which would be of interest to the landlord community. She does not believe that it would be helpful to make recommendations that favour one party over others. Instead, she encourages administrators to work fairly with landlords, and insolvency practitioners’ regulators to be conscious of the issues.

The British Property Federation has welcomed the recommendations to encourage transparency, but expressed concern about the lack of a statutory obligation which could result in the recommendations not being fully adopted.

To access Nabarro’s fuller briefing on the outcome of Graham’s review, please click here.