Landlords and creditors look set to benefit from new legislation imposing independent checks during the controversial pre-pack administration process.
Independent scrutiny will be mandatory for pre-pack deals, among other measures to increase transparency during proceedings.
Under draft regulations to be set out before parliament, an administrator will not be able to dispose of property held by a company to a connected party within the first eight weeks of administration without either creditor approval or an independent written opinion. The connected party purchaser will be required to obtain the written opinion.
However, the measures stop short of powers to halt disposals if an independent check results in a negative opinion.
Where a report concludes that the case is not made for the disposal, an administrator can still proceed with the disposal but must provide a statement setting out its reasons. Copies of these would be sent to company creditors and filed on Companies House.
Notably, a connected party purchaser also has leeway to obtain more than one report, meaning that multiple attempts could be made before they achieve the answer they want.
Regardless, the industry has broadly welcomed the prospective changes. Ion Fletcher, director of finance policy at the BPF, told EG that despite the concerns, the proposals marked a “move in the right direction”.
“This is a really positive development – it’s something we’ve been calling for, at least for the past five years, ” he said. “This will provide much-needed transparency and provide reassurance that a sale has been completed in a fair manner.”
Mathew Ditchburn, partner and head of real estate disputes at Hogan Lovells, said the new measures should at least “give landlords and other creditors greater confidence in the process”, even if they would likely fail to materially reduce the number of pre-packs going forward given the disruption from the pandemic.
He added: “It should also give administrators pause for thought before signing off on pre-pack sales for anything less than fair market value based on a robust independent valuation of the business.”
One independent body that could provide written opinions would be the Pre Pack Pool, which was set up following recommendations from the 2014 Graham Review. The BPF is among its founding parties.
This has so far operated on a voluntary basis. The number of referrals to the pool since its creation have been low – only 36 referrals were made in 2016 out of 163 eligible transactions, falling to just 18 in 2018.
The new measures follow the end of a five-year sunset clause on government powers in May earlier this year, which enabled it to ban or regulate the sales of businesses in administration to connected parties. These powers were subsequently revived in the Corporate Insolvency and Governance Act, but will end in June next year.
Since the government’s revived powers must be used before June, it aims to bring forward the new regulations as soon as parliamentary time allows within that period.
Lord Callanan, minister for corporate responsibility, said the measures “will promote viable business rescue while balancing the rights of those affected by failure and will contribute to leading the country’s economic recovery from Covid-19”.
Companies that have turned to pre-packs this year include clothing retailer Quiz, which put 82 stores into pre-pack administration, and Monsoon Accessorize, which is closing 35 stores after its founder bought the business out of administration.
See also: Lords ramp up calls for greater pre-pack scrutiny
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