The Insolvency Service

IS 14

Written evidence submitted by British Property Federation

The British Property Federation (BPF)

1. The BPF is the trade association for the property investment sector. In that context our members include most of the larger companies and institutions investing in the commercial property sector, sector specialists and smaller commercial landlords, as well as fund managers and investment banks.

Introduction

2. In this submission we have focused on our areas of specialism and interest, specifically pre-packed administrations and Notices of Intention to Appoint an Administrator (NoIAA). This means we have not covered the range of issues the Committee is seeking to explore.

Pre-Pack Sales

3. Whilst we are mindful of the role that pre-pack sales have to play in rescuing businesses, we have highlighted our concerns to the Insolvency Service that, in some instances, the communication between the restructuring company and the creditors to that business is poor resulting in creditors being presented with a pre-pack situation that they are unable to influence or highlight foul play. We have, therefore, been supportive of the intentions to give unsecured creditors a greater say in the pre-pack process especially where there has been no marketing of the business assets and a subsequent sale to parties connected with the insolvent business, to ensure greater transparency in the overall process.

4. In seeking to resolve this, the Insolvency Service has been thorough in consulting with all stakeholders affected, sometimes involving us solely with other creditor representatives, and sometimes with a broader range of stakeholders, including insolvency professionals. There is a delicate balance that officials are trying to strike, on the one hand providing greater protection for creditors, whilst on the other hand not undermining the pre-pack process.

5. In pursuit of that policy objective the Insolvency Service has proposed a three day notice period for pre-pack sales. Such a short period would only be of practical use to creditors if the lodging of any concerns was a relatively easy process. We believe that is what is planned.

6. For the administrator, a three-day notice period could be damaging to the rescue and so we also support the compromise that allows for the insolvency practitioner to ask the Court to set aside the three day notice period if the Court’s judgment feels it would prejudice the conduct of the administration.

7. Policy has evolved on this issue during the course of the recession from reliance on self regulation via Statement of Insolvency Practice (SIP)16 and the lodging of SIP16 notices with the Insolvency Service, to the most recent announcements on pre-packs. One in four SIP16 notices were not lodged with the Insolvency Service in 2010, despite this being a require on insolvency practitioners, and having had one false start on a statutory instrument to tighten up regulation in this area, creditors are hopeful that legislative change will now be delivered expeditiously, so that their interests are properly protected.

The Misuse and Tactical Use of Statutory Notices of Intention to Appoint an Administrator

8. The Insolvency Act 1986 outlines the key mechanisms as to how a notice of intention to appoint an administrator (NoIAA) should operate. At the point where a notice is filed, a ten day moratorium is triggered preventing creditors from taking action to recover the debts due to them. Whilst we support a notice period in allowing a window free of action with which to appoint an administrator, we feel that there are certain abuses taking place where a notice is filed consecutively in order to prolong the moratorium period. This can be hugely beneficial especially if the period includes quarterly rent payment. Also, there is a far broader issue about the tactical timing of use of notices of intention, where the notice is served in the days leading up to a rental payment.

9. Most existing commercial leases require rentspayable quarterly in advance. However, if a notice of intention is served shortly before the quarter day, landlords cannot enforce rental payments as a result of the interim moratorium. Once an administrator is appointed, the entire quarter’s rent will be classed as an unsecured pre-appointment debt under the Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] judgement and therefore not paid as an expense of the administration.

10. We have highlighted cases of abuse to the Insolvency Service, including the case of a jewellery chain, where a notice was served purely to get the benefit of the interim moratorium. A memorandum from the company’s administrators expressly stated: "In order to further consider the restructuring options available to them and to provide an opportunity to explore both a sale and restructuring of [the retailer], and with the next rent quarter day due on the 23 December 2010, the directors of the Companies took the decision to issue a notice of intention to appoint administrators… on 23 December 2010 in order to protect the Companies’ assets in the short term via an interim moratorium". We have calculated that over £1 million in rent was denied to its landlords across 78 stores as a result of this action.

11. This is not a situation where a company serves notice and then does not go into administration, as the rent will still be payable once that notice expires, but where the notice is filed tactically before the rental due date in order to prevent the landlord from distraining or threatening to forfeit to recover the rent. Losing a quarter’s rent on a commercial property has a significant impact and can lead to financial problems for the landlord.

12. Furthermore, particularly in a "pre-pack" administration, it is in the interests of the company to delay the appointment of the administrator and sale until after the rent payment day, as rent payable by the administrator for using the property, which he will seek to recover from the purchaser under a licence to occupy, will only start from the appointment date. Anything due prior to this is an unsecured claim, will remain unpaid and will be of no concern to the purchaser and its directors, despite the fact that the business has benefitted from trading from the property throughout. The longer the moratorium period goes on; the longer the purchaser gets the benefit of the company having traded "rent free".

13. We have engaged with the Insolvency Service on this matter and have found them constructive. Limiting notices to a specific number such as two would address the problem of multiple serving of them, but not the underlying tactical issue, and we would agree there will be situations where serving more than one notice in succession is wholly legitimate.

14. We believe that a better solution all-round, is to address the situation of the landlord during a moratorium period. One possible solution would be to treat landlords differently from other creditors given that they are unable to terminate supply of a service. It has been suggested that under the Goldacre judgement, where the rent be paid as an expense of the administration, that this be extended to cover the interim moratorium period requiring rent to be paid in full. A further solution would be for the administrator to treat the landlord as a secured creditor in the administration for rents accruing during the interim moratorium.

15. Such policy solutions could only be pursued via legislation. The Insolvency Service may have to consider legislative change as a result of Goldacre more generally and if so, we will be pushing for this issue to be considered. In the meantime, we would like to see a Statement of Insolvency Practice (SIP) on notices of intention, so that there is greater clarity on what is professional practice in this area.

23 January 2012