Insolvency reform an "obvious" solution to landlord concerns about fairness of pre-packs, expert says

A property industry body has criticised insolvency procedures, arguing that they can result in landlords losing income when retailers enter insolvency.

"Successful restructurings of distressed businesses rely heavily on consensual support," said restructuring law expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com. "Over time, the status quo could have a corrosive impact on important relationships based on trust and confidence."

Recent court decisions had undermined incentives for tenants and insolvency practitioners to adopt an inclusive approach by confirming that the timing of the appointment of administrators could be "of genuine strategic importance to all concerned", he said. Earlier this month the High Court confirmed that rent falling due before administrators were appointed should not be treated as an expense of the administration, even where the administrators continued to trade the business from the rented premises.

Lomax's comments came as industry body the British Property Federation (BPF) condemned the "underhand practices" of some private investors, who it claimed were "profiting from retail failure" by pressurising landlords into accepting concessions on the existing leases of profitable stores in situations where the business is sold onto a new buyer shortly after entering an insolvency procedure. During a 'pre-packaged' insolvency, the business is marketed to a new buyer before the proposed insolvency procedure begins so that its value can be maintained by minimising the length of the insolvency process.

The BPF said that by keeping the terms of the sale deliberately vague, agents for the buyer of an insolvent company could threaten landlords that if concessions are not given then that landlord's property will not feature in the sale. The Government should amend the existing Insolvency Practitioners' guidance notes, known as SIP16 (4-page / 106KB PDF), to make it clearer which assets form part of a pre-pack insolvency and on which the insolvency practitioner is willing to negotiate or does not require.

"The prime role of the insolvency practitioner in any rescue is to secure the best result for creditors, not to maximise the profits of the new company, and we are becoming increasingly concerned that insolvency practitioners are acting more in the interests of the buyers than creditors," said Liz Peace, BPF chief executive.

"On both the flaws in pre-packs and better regulation of the insolvency sector, the Government has frankly analysed the problems to death and it now needs to act if it is to maintain unsecured creditors' trust in the insolvency system. An enterprise economy works first and foremost on trust and written contracts. If both become worthless that has serious implications for enterprise and economic efficiency."

SIP16 should also be amended to specifically discourage collusion between the insolvency practitioner and buyer to extract concessions on leases that are part of the sale, the BPF said. It also called for tighter rules on advertising, and for better regulation of the insolvency sector including a simpler process for making complaints.

Property law expert Anna Davies of Pinsent Masons said that the BPF's comments reopened the debate between "the competing interests of landlords seeking to protect the value of their investments, and insolvency practitioners seeking to preserve the value of the insolvent tenant's business for the benefit of creditors".

"As with all issues, transparency and communication between all the relevant parties could ease such tensions and reduce possible disputes between landlords and insolvency practitioners," she said.

The Government previously proposed changes to the pre pack regime which would have seen creditors given three days' notice if a company was to be sold to a connected party. Insolvency practitioners do not have to give notice of a pre-packaged sale to unsecured creditors, although the permission of banks and other secured creditors is required. The plans were abandoned at the start of this year.

"In light of the Government's abandonment of legislative reform to the pre-pack phenomenon, regulatory reform of the insolvency profession is an obvious alternative," said restructuring law expert Alastair Lomax.

"Of course, landlords are not the only creditors pushing for a more open and inclusive approach," he added. "Regulators face the same dilemma that no doubt caused the collapse of proposed legislation, namely: in a regime where informed creditors have the freedom to act unilaterally, is it realistic to require an open and inclusive approach without obliterating the businesses that pre-packs are often deployed to preserve?"

Insolvency professional body R3 defended the current system in an interview with trade publication Accountancy Age. "Retailers are struggling with leases that were set up during the good times and set up many years ago," said its vice president Lee Manning. "It is time for landlords to be more flexible before the point at which struggling businesses reach insolvency."