A LANDMARK ruling will have a game-changing effect on the way landlords are paid in a corporate collapse, essentially giving them super creditor status. But what impact will this have on other creditors, and the insolvency profession?
A consortium of landlords appealed and won a case that will see them repaid £3m in back rent due prior to the collapse of digital game retailer GAME from the new owners of the business.
The business collapsed in 2012 with PwC administrators able to continue to trade the business as a going concern before its sale to Baker Acquisitions, without making a payment to the landlords.
Previously, if a company entered administration the day after the quarterly rent payment is due on a property, then the rent for that quarter could legally go unpaid, with the landlords becoming a secured creditor and paid a percentage of assets realised during the administration. This process effectively allowed the administrators a three-month grace period, in which they could trade while seeking a buyer.
However, the Appeal Court ruling means rent will now be classed as an expense of an administration, which is paid ahead of creditors, and administrators must pay rent for any time that they occupy a property.
Game Group entered administration in March 2012, the day after its quarterly rent became due, and continued to trade from many of its premises while in administration without having to pay rent.
More fair and balanced
Some in the profession believe paying for what you use is a more fair and balanced approach. KPMG partner Brian Green says: "The new ruling, which creates the possibility of a ‘pay as you trade' scenario, not only paves the way for greater collaboration between insolvency practitioners and landlords, but crucially, will also allow administrators to better plan and maximise the value of the business for creditors, irrespective of the date of appointment."
This latest move by the Appeal Court is sending the process back to what it was under prior case law. Previously, administrators would pay rent in full, regardless of whether the business continued to occupy the property, explains Green. However, if there was no money available to make such payments, the administrator would usually have to close premises before the rent due date, often shedding jobs in the process.
With rent having such a big financial impact on struggling businesses, we could see an increase in pre-pack administrations or more closures because administrators are unable to pay the rent, explains FRP Advisory partner, Glyn Mummery.
"One of biggest issues an administrator faces is sufficient funding to trade a business whilst potential purchasers are found," he says.
"A 'pay as you go regime' is a pragmatic commercial approach but is likely to undermine the marginal cases and the rescue culture in turn and/or potentially encourage the use of the pre-pack process."
However, Deloitte's restructuring partner Lee Manning disagrees, suggesting the ruling will see fewer pre-packs. He believes some administrators currently rush through a sale prior to the quarterly rent due date to save themselves that extra cost. A pay as you go culture would mitigate that risk.
"Potentially this may even reduce the number of pre-packs where the liability for an entire quarter's rent had forced companies and administrators to sell a business more rapidly, and creditors could see benefits from fewer pre-packs," he says.
While there are different opinions as to the impact of the latest case, administrators can at least approach their work with more structure, says R3 deputy vice-president Phillip Sykes.
"Treating rent as an administration expense may mean a smaller pot for a business' creditors as a whole, but at least the administrator will now know, and be able to make provision for the costs involved, in an administration.
"Extra clarity can make the difference between a business being rescued or not," he adds.
Mike Jervis and Stuart Maddison, partners at PwC, were appointed joint administrators of the UK and Ireland operations of Game Group, Game Stores, Gameplay (GB), Games (Stores), Game Station, Game (retail) and Gamestation on 26 March 2012.
The business was sold to Baker Acquisitions, owned by parent company OpCapita, which acquired 333 UK stores and nearly 3,200 employees.
PwC declined to comment.
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