Calls for CVAs to be referred to the Pre-Pack Pool as concerns increase about their usePrint publication
Following the recent upsurge in CVAs, the British Property Federation has called on government to conduct an urgent review into their use (and potential misuse) and advocates that CVAs should be referred to an independent third party, such as the Pre-Pack Pool, for review.
There has been a lot of attention in the business press recently about the use of CVAs by household names in the retail and casual dining sector. We reported in February that an increase in the number of CVAs looked likely in 2018 because the process can suit high street retailers and food outlets struggling with large lease liabilities. This appears to be the case, so much so that concerns are increasingly being expressed that the process is being abused, with the British Property Federation (BPF) now joining the debate.
The BPF’s main areas of concern are a lack of transparency, unfair discrimination between different creditors and the lack of regulation to ensure CVAs are used appropriately. Melanie Leech, chief executive of the BPF comments: “The CVA process is intended to be part of a comprehensive business recovery plan. Property owners, looking after savers and pensioners’ money, will support businesses who demonstrate this commitment but must protect those pensioners against unfair action that penalises their interests. Urgent action is required and we are calling on government today to undertake a review, so that we can restore the CVA process to its original purpose.”
The only way to challenge a CVA is to go to court within 28 days of the creditors’ meeting/decision process. The BPF believe that this is not a particularly satisfactory way to seek a second opinion and therefore suggests that CVAs which affect more than five outlets should be referred to an independent third party, such as the Pre-pack Pool, for review.
The Pre-pack Pool came into effect on 2 November 2015 to give a second opinion on pre-packs after the 2014 Graham Review recommended improvements in order to alleviate concerns at a perceived lack of transparency and to provide some assurance for creditors that the proposed transaction had been reviewed by independent experts. The use of pre-packs has always been controversial, especially in the majority of cases where the purchaser is a connected party.
Use of the Pool is voluntary. Application is made online by the potential purchaser with a fee of £800 + VAT payable by the applicant. Upon receipt of the application, the Pool member will offer one of the three following opinions:
- he/she has not found anything to suggest that the grounds for the proposed pre-pack are unreasonable;
- the evidence provided has been limited in some areas, but otherwise he/she has found nothing to suggest that the grounds for the proposed pre-pack are unreasonable; or
- there is a lack of evidence to support a statement that the grounds for the proposed pre-pack are reasonable.
The Pool will not give reasons for its decision nor enter into correspondence. The opinion is not binding on any interested party but instead purports to provide for enhanced stakeholder confidence in the pre-pack transaction and purchasing entity.
Use of the Pool
During the first year of its existence, 53 referrals were made to the Pool. Of these, 34 received a ‘not unreasonable’ opinion, 13 received a ‘not unreasonable but limitations to evidence’ opinion, and 6 received a ‘case not made’ opinion. During 2017, only 23 proposed connected party pre-packs were referred to the Pool. Of these, 11 received a ‘not unreasonable’ opinion, 8 received a ‘not unreasonable but limitations to evidence’ opinion and 4 received a ‘case not made’ opinion.
According to statistics provided by the Pool, the total number of pre-packs since the Pool came into effect is 727 and of these 391 were to connected parties. Accordingly, just 28% in 2016 and 11% in 2017 of connected purchasers applied to the Pool.
Clearly the figures are highly disappointing for the Pool’s supporters and raise questions as to whether setting up the Pool has been worth the time and effort.
There are a number of possible reasons why the take-up has been so disappointing, including:
- the best “opinion” that a prospective purchaser can hope for is that there is nothing to suggest that the grounds for the proposed pre-pack are unreasonable – hardly a ringing endorsement and unlikely to be sufficient to assuage aggrieved creditors;
- the possible finding that there is a lack of evidence to suggest the pre-pack is reasonable. The giving of such an opinion does not mean the transaction cannot go ahead but it does mean that the insolvency practitioner must explain to creditors why he/she felt the sale was appropriate notwithstanding the opinion;
- given that pre-pack sales are often carried out under great time pressure, the likelihood of a delay of a couple of business days while the opinion is sought could be critical to the survival of the business being acquired; and
- no justification is provided as to why the Pool member has made the determination: it may be a somewhat futile task turning an unreasonable pre-pack into a reasonable one without being told the reasons for the pre-pack failing to meet the “reasonable” criteria used by the Pool member.
More generally, it is somewhat ironic that a non-transparent process has been introduced to alleviate a perceived problem of non-transparency in pre-pack sales to connected parties.
The current disappointing take-up may, of course, change if there is a momentum shift, such that it becomes standard practice for a purchaser to seek an opinion from the Pool or a determination or otherwise from the Pool is an important factor in any Court challenge to a pre-pack, or, as the BPF has advocated, use of the Pool becomes compulsory for both pre-packs and CVAs. There is no sign, however, that we can expect this to happen any time soon.