Lords ramp up calls for greater pre-pack scrutiny

A handful of Lords are backing industry proposals for greater scrutiny of pre-pack administration deals. They want to see a clause added to the new Corporate Insolvency and Governance Bill – which is currently making its way through parliament – that makes the referral of connected party pre-packs to a pool of independent business experts, mandatory. Through the 2015 Small Business, Enterprise and Employment Act, the government had been allowed to decide whether to ban or regulate the sales of businesses in administration to connected parties. However, this lapsed at 26 May 2020 as part of a five-year sunset clause. But in the Lords yesterday (10 June) Baroness Neville-Rolfe queried whether this could be resolved in the Bill. The Pre Pack Pool, an independent body designed to make the process more transparent, wrote to minister for corporate responsibility Lord Callanan last month warning that it was at risk of collapse. The body, which comprises a committee of experienced business figures, was among several tools designed to improve transparency recommended by the 2014 Graham Review into pre-pack administrations. It counts the BPF among its founding parties. Only 10% of eligible pre-pack cases are being referred to the pool, with just 21 referrals last year. As many as two-thirds of pre-pack administrations are said to be to connected parties. Lord Vaux of Harrowden said: “The Bill gives us the opportunity to fix that. It is important that we act quickly, given the unfortunate likelihood of higher numbers of companies becoming insolvent.” He asked government to consider adding a clause to the insolvency Bill to make referral mandatory. “That would be a very simple but important way of making sure that the balance between saving a business and protecting creditors is appropriate and transparent,” he said. Lord Mendelsohn echoed the call: “Pre-packs will become a more obvious way to game the system. Their exclusion is a charter for abuse. Even prior to the more general review, will the government consider a simple amendment to make it compulsory for pre-packs to go to the currently voluntary pre-pack panel? The opportunities to game the system are inherent in the language of the moratorium.” British Property Federation chief executive Melanie Leech said: “Independent scrutiny of pre-pack administrations reinforces trust in administrators, and reassures property owners that the process has been transparent and fair.  “The Pre-Pack Pool scheme, which acts as the independent third party, is however only voluntary and hasn’t been widely used, and so we urge the government to amend the Corporate Insolvency and Governance Bill and make this scheme mandatory.” She added: “Pre-packs often involve purchasers already connected to the insolvent company and mandatory scrutiny by the Pre-Pack Pool will ensure property owners can protect their investors, including the millions of people whose savings and pensions are invested in commercial property.” Lord Callanan said: “The government recognises creditors’ concerns about pre-packs, particularly where the sale is to a connected party. If strengthening of professional standards and the existing regulation do not deliver increased creditor confidence in connected pre-pack sales, the government will look to bring forward further legislation.” Insolvencies are widely expected to surge over the coming weeks and months as many businesses have halted trading as part of the coronavirus lockdown. A string of retailers have set out plans to restructure their store portfolios during this week, which risks leaving more landlords in the lurch. With the next quarterly rent day on 22 June fast approaching, several retailers and food and beverage operators are proposing wide-ranging closures and rent renegotiations. Clothing retailer Quiz has put its 82 standalone stores into pre-pack administration, allowing it to offload loss-making locations, while fellow retailer Monsoon Accessorize will close 35 stores and renegotiate terms on the remaining 162, as founder Peter Simon buys the business out of administration. Monsoon Accessorize utilised the CVA process last year, in which it called for rent cuts ranging between 25% and 65% at 135 of 258 shops. Other operators pushing for insolvency proceedings include Frankie & Benny’s owner The Restaurant Group, which has proposed a CVA involving around 125 restaurant closures, as well as rent cuts and revised lease terms for a further 85. To send feedback, e-mail pui-guan.man@egi.co.uk or tweet @PuiGuanM or @estatesgazette