This is the third of a series of four e-bulletins in relation to administrations and company voluntary arrangements (CVAs). The first, dated 23 September 2008, gave an overview of the administration process. The second, dated 11 February 2009, considered the points that landlords should consider in relation to empty rates.

This e-bulletin considers the approach that the courts have recently taken in relation to a pre-pack administration and the practical points that landlords should consider when faced with a pre-pack administration situation. The fourth e-bulletin (to follow in the next few weeks) will be in relation to CVAs and will specifically consider the approval process and points to consider in relation to the interests of landlords.

  1. What is a pre-pack administration?

A pre-pack administration can be described as a "fait accompli" arrangement for the sale of the business shortly after the appointment of an administrator. All of the preparatory work is usually done before the administrator's appointment including valuing the business and agreeing with the prospective purchaser all of the terms for the business sale. It is to enable the profitable part of the business to continue without interruption and to avoid the losses and devaluation that would arise if there was a delay in the sale or an open administration. It also allows for valuable contracts to be maintained and employees retained by the purchaser more effectively than a sale following an open administration.  

  1. Issues for landlords

More often than not, the administrator will allow the purchaser of the business to occupy the premises leased to the insolvent company as licensee without the consent of the landlord and (often) in breach of the occupational lease. Although the administrator may be paying the rent to the landlord whilst the purchaser is occupying, the landlord is nevertheless placed in a difficult and unsatisfactory position (a) with an occupier with which it has no direct relationship or knowledge of credit worthiness and (b) limited (or no) details about the terms or intended duration of the purchaser's occupation.

The usual action that a landlord can take (such as forfeiture or an injunction) is not available because of the statutory moratorium that applies whilst a tenant is in administration, unless the landlord first obtains the consent of the administrator or the permission of the court.  

  1. When will the court give the landlord permission to take enforcement action?

In Re Atlantic Computer Systems plc [1992] Ch 505, the Court of Appeal set down various principles that should be applied by the court when considering whether to grant the landlord permission. Those principles were recently applied by the Court of Appeal in the case of Innovate Logistics Ltd (in administration) v Sunberry Properties Ltd [2008] EWCA Civ 1261.

In the latter case, Innovate was the tenant of premises used for cold storage and Sunberry was the landlord. The purchaser of Innovate's business was YHL and the administrators granted YHL a six month licence to occupy in breach of the lease. The licence was granted to enable YHL to take over Innovate's contracts and also so that YHL could collect in book debts for the purposes of the administration. Under the licence, YHL had to make monthly payments equal to one month's passing rent under Innovate's lease and those payments were passed to Sunberry. But Sunberry wanted YHL to take an assignment of Innovate's lease so it sought to apply pressure by seeking permission from the court to bring proceedings for a mandatory injunction 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 because it determined that the termination of the licence would prejudice one of the purposes of the administration, namely the collection of the book debts. Under the terms of the sale agreement, YHL was responsible for collecting those book debts. If YHL was unable to collect the book debts, consequential losses would be suffered by Innovate's creditors. Also, the Court of Appeal said that an injunction was inappropriate in circumstances where Sunberry was not out of pocket by the continuation of the short term licence because it was being paid rent (albeit on a monthly as opposed to quarterly basis) that Innovate was otherwise unable to pay.

So, the Court of Appeal found that the overall interests of the unsecured creditors of Innovate outweighed the proprietary interests of Sunberry and that the occupation by YHL had to be tolerated by Sunberry even though it was in blatant breach of the lease.

Whilst this decision does not lay down any definitive new principles, it does highlight that the outcome of each case depends upon its own specific facts. It also demonstrates the balance that a court will endeavour to strike between the competing interests of the landlord and other unsecured creditors.  

  1. What is the landlord entitled to know?

Due to the fact that landlords were consistently being left in the dark during a pre-pack administration process, rules were introduced on 1 January 2009 (Statement of Insolvency Practice 16) to make the process more transparent. These rules, essentially, require administrators to disclose certain information about the purchaser and the terms for the sale of the business and to demonstrate that they have performed their functions in the interests of the company's creditors as whole.

Since the introduction of these rules, administrators are tending to be more forthcoming with the relevant information but there are nevertheless practical points that landlords should always consider to protect their position.  

  1. Practical points for landlords

Landlords should always:

  • ask the administrators to state at the outset their intentions for the premises and whether the rent will be paid;
  • if the premises are being occupied by the purchaser of the business, insist upon evidence of the basis for the occupation (i.e. disclosure of the occupational licence or other arrangement) and ask if the purchaser intends to occupy on a short or long term basis;
  • if long term occupation is intended, insist upon a formal application to assign the lease (in accordance with the lease requirements) and the payment of the landlord's reasonable costs of dealing with the application;
  • agree to consider any application to assign only on a without prejudice basis if the landlord wishes to protect its position in relation to any unlawful occupation;
  • decide upon how the landlord wishes to deal with any unlawful occupation before accepting any rent from the administrators or the purchaser;
  • check the lease to see if the landlord is entitled to require an inspection to assess the actual position on the ground;
  • decide upon the most favourable outcome, be it taking back the premises and re-letting, securing an assignment of the lease or maintaining the payment of rent;
  • consider if there are any former tenants or guarantors that could remain liable; and
  • consider whether accepting monthly payments from the administrators could release any guarantors from liability.