A Brief Guide to “Pre-Pack” Administrations

What are they?

A "Pre-Pack" administration is a fast track administration which is aimed at avoiding a failing business being sold on the open market.  Instead the Insolvency Practitioner lines up an advanced purchaser to take over profitable parts of the business with the company going into administration simultaneously with the sale. The process sees the best elements of the business, including those required to keep the business viable such as stock, premises and staff sold to the purchaser with the rest being left behind. If the property element of the sale includes Leases and if the purchaser wants to take on those leases as part of the business then those Leases have to be assigned with the consent of the Landlord. This is where the "Pre-Pack" administration comes into conflict with the interests of Landlords.

Are "Pre-Packs" good or bad?

Some are in favour of "Pre-Pack" administrations, i.e. they protect a company's goodwill and value and the result of a "Pre-Pack" may not be any worse than that of a trading administration, and some do not, i.e. they can be abused to create phoenix "Pre-Packs" to allow the old company to rid itself of creditors.  The reality is that they are here to stay and so the Landlord has to deal with the situation as and when it arises.

What happens when a "Pre-Pack" takes place?

Ordinarily under the terms of a Pre-Pack" administration the purchaser will occupy the premises leased to the insolvent company as licensee without the consent of the Landlord and very often this will be a clear and obvious breach of the terms of the Lease. The Landlord may not realise what has actually occurred until it receives official notice of the administration or perhaps notices that rent is no longer being paid through the "usual" account and so ordinarily the news will come as something as a surprise and the natural response is to seek advice.

What can be done?

Although the administrator may be paying the rent to the Landlord whilst the purchaser is in occupation the Landlord is in a very difficult position given that it now has an occupier which it has no direct relationship with, in terms of its covenant strength or otherwise, and where it has limited or no details about the terms or intended duration of the purchasers' occupation. The Landlord's usual course of action given the breach of the Lease, such as seeking to forfeit the Lease or obtaining an injunction in relation to the ongoing unauthorised occupation, is not generally available because of the statutory moratorium that applies whilst a tenant is in administration.  Such action can only be taken where a Landlord is either able to obtain the consent of the Administrator, which clearly is unlikely to be forthcoming if the property forms part of the sale to the new purchaser, or with the permission of the Court.

How would the Court view any application for permission?

In Re Atlantic Computer Systems plc the Court of Appeal laid down principles that should be applied by the Court when considering whether to grant permission or not. Those principles were recently re-considered by the Court of Appeal in Innovate Logistics Ltd (in administration) v Sunberry Properties Ltd. In this case the purchaser of Innovate's business had been granted a six month licence to occupy the premises in breach of the Lease by the administrators. Under the terms of the Licence the purchaser was to make monthly payments equal to one month's passing rent under the Lease and those payments were to be passed to Sunberry by the administrator.  Sunberry wanted to force the purchaser to take an assignment of Innovate's Lease and so as a means of applying pressure sought the Court's permission to bring injunctive proceedings requiring the termination of the Licence on the basis that it had been granted in breach of the Lease.

The Court of Appeal refused Sunberry permission essentially on the basis that the termination of the Licence would prejudice one of the purposes of the administration namely the collection of book debts. This was because under the terms of the sale agreement the purchaser was responsible for collecting the book debts. If the purchaser was unable to use the property and so was unable to collect the book debts then consequential loss would be suffered by Innovate's creditors.

The Court of Appeal also took the view that an injunction was inappropriate where Sunberry was not out of pocket due to the continuation of the Licence because it was still being paid rent albeit on a monthly as opposed to quarterly basis where Innovate would otherwise be unable to pay.

Why did the Court take this view and what might it do in future cases? 

The Court of Appeal weighed the overall interests of the unsecured creditors of Innovate against the interests of Sunberry and found that although the occupation by the purchaser was a breach of the Lease, as it had to be, this had to be tolerated by Sunberry in circumstances where otherwise the interests of the unsecured creditors would be put in jeopardy. Clearly in the current climate it would seem likely that when a Court is balancing the competing interests of a Landlord and other unsecured creditors it is likely that the unsecured creditors will come out on top unless there are particular circumstances to justify otherwise.

More protection for Landlords against sham "Pre-Packs"?

Rules were introduced on 1^st January 2009 (Statement of Insolvency Practice 16) to make the "Pre-Pack" process more transparent. The rules require administrators to disclose certain information about the purchaser and the terms of the sale of the business and to demonstrate that they have performed their functions in the interest of the company's creditors as a whole. The effect of the rules having been introduced is tending to make administrators more forthcoming with information when dealing with Landlords but there are still practical issues that the Landlord should always consider when looking to protect their position.

So what are the practical issues?

• The Landlord should ask the administrators to state at the outset what the intentions are for the property and whether and how the rent will be paid. 
• The Landlord should make clear to the administrator and the purchaser that any dealings it has with them are without prejudice to its legal rights under the terms of the Lease. 
• If the premises are being occupied by the purchaser then the Landlord must insist on seeing the terms upon which it is occupying and ask if the purchaser intends to stay on a short or long term basis and if it is to be on a long term basis should insist on a formal application for consent to assign being made in the usual way and on the usual terms. 
• The Landlord should consider how best it can arrange to inspect the property - either through the terms of the Lease or as part of the discussions with the administrator or purchaser as it will need to try to ascertain the condition of the property and how it is being used. 
• Consider whether there are any former tenants or guarantors that may be liable for the rent or whether a rent deposit could be used to secure payment. 
• If the Landlord is minded to seek permission from the Court to forfeit the Lease or seek an injunction then it will need to consider the evidence available to it in terms of proving why it's position is different to Sunberry's i.e. is there serious damage to the Landlord's reversion as a result of the unauthorised occupier. 
• Commercially the Landlord needs to consider what the most favourable outcome for it would be in the current market place - i.e. would taking the premises back and re-letting provide a better outcome than securing an assignment of the Lease or simply maintaining the payment of rent on whatever terms the administrator has offered. 

Concluding Comments? 

"Pre-Pack" administrations are here to stay and are a sign of the times. They allow tenants to avoid remedies that would otherwise be open to Landlords but as and until the economy turns they are something a Landlord will need to learn to understand and deal with. From a Landlord's perspective it needs to concentrate less on the fact that it is caught up in a "Pre-Pack" and more on what it thinks it can achieve through discussions with the administrator and purchaser, what it could achieve if it had to try to let the property in the market place and what, if anything, it could achieve through the Courts. Having set the strategy the Landlord can then move forward and deal with the administrator and the purchaser. In the current market place if rent is continuing to be paid then clearly that is a better scenario than receiving no rent at all. As such unless there is something peculiar or unique in relation to the Landlord's position as a result of the purchaser's occupation the best route will often be to try to maintain the rental stream, move towards an assignment being taken and avoid the cost of involving the Courts. 

Disclaimer - This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. It is intended only to highlight general issues or changes in the law which might be of interest to our clients and contacts.