It is perhaps not unexpected that a company called Go Outdoors has struggled somewhat in lockdown. For the uninitiated, a pre-pack is where a company is put into administration and its business and assets are immediately sold by the administrator to a purchaser (often a purchaser connected with the existing management). The purchaser and the administrator will have agreed the sale terms prior to the administrator being appointed.

From the point of view of the purchaser and the business that is sold, a pre-pack has many benefits, not least that the business can carry on as a going concern and that the purchase is effected without relevant parties (including, perhaps most notably in retail, customers) being as aware of the insolvency element of the process as they would have been if the company had been in administration and trading for a while in administration. In Go Outdoors, the press releases focus on this being a "restructuring" rather than an insolvent administration and the hope would be to minimise any damage to the brand that association with things like "insolvency" and "not paying your debts" would otherwise bring. 

Not every business is suitable for a pre-pack and it is for the administrator to decide whether a pre-pack transaction is appropriate in any given business.  At a very basic level, what "appropriate" means is that the creditors of the insolvent company are better served by a pre-pack than by any viable alternative.  Usually the justification is a very simple one - the administrator considers that the pre-pack sale will generate a higher return for creditors than any other approach would.

What is interesting here is that, in recent times, the "favoured" route for dealing with insolvent or distressed retail entities has been to propose a CVA, not generally to carry out a pre-pack. Insolvency advisors often consider that a pre-pack and a CVA are alternative approaches to achieve similar outcomes. What comes out at the end of each process is intended to be a slimmed-down, fitter version of what went into the process. This slimmed down version will presumably be better able to trade profitably going forward. In retail insolvencies, the slimming down usually means ditching unprofitable units or reducing rental obligations. It is usually landlords who bear the brunt. For that reason, landlords have been extremely critical of CVAs and often view them merely as a device that allows a failing retail chain to shed its obligations to landlords. Landlords are now far more likely to raise legal challenges to CVAs than was previously the case. 

So how does a CVA compare to a pre-pack if you are a landlord?

One big difference between a pre-pack and a CVA is that in a CVA there is no change of legal entity. The same company carries on in business.  With a pre-pack it is a new company that takes on the business.

That means that in a pre-pack transaction, the newco has to find a way to become entitled to trade from the relevant stores.  That will almost always require the landlord to agree to the existing lease being assigned to the newco (either on existing terms or with variations), or the landlord has to agree to terminate the existing lease and grant a new lease to newco.  Usually the administrator of the insolvent company will grant a licence to occupy the premises to the newco at the point of the business sale. This allows the Newco to commence trading straightaway while the newco attempts to sort out and formalise its position with the landlord. It is always open to the landlord to refuse to accept newco as a tenant on any terms and so newco's continued occupation of the premises is not guaranteed.

That may make it sound as though the landlord has the upper hand in negotiations but the landlord will want to avoid the premises being left empty, at all costs, and that allows the newco (particularly in the current market) to be very aggressive in its demands for new or amended lease terms going forward.  There is, indeed, no obligation on the newco to even try to take over all of the existing leases and where certain outlets have been determined to be highly unprofitable, the newco may simply not take a licence to occupy at all in respect of those premises. They will then be left for the administrator of an oldco simply to close down and deal with as an unsecured creditor in the administration. 

By contrast, in a CVA, if the retail company wishes to compromise a lease, the CVA has to deal with that lease.  Each CVA proposal is, of course, different and it is impossible to generalise but, at least in a CVA, an affected landlord will get a vote. There is no vote in a pre-pack.  Although much of the criticism around CVAs is that landlords' voices are not heard sufficiently loudly in the process, in a pre-pack it is possible to exclude certain landlords completely and just leave them behind without the landlord having any say whatsoever. And remember that a pre-pack will often happen with no prior warning. In a CVA the landlord will at least have an opportunity to consider the proposals before they are implemented. Indeed the increased willingness of landlords to raise legal proceedings to challenge CVAs may mean that companies are more reluctant to propose CVAs because of the uncertainty that landlord challenges would bring. That may be a reason why a distressed company would look to do a pre-pack rather than a CVA.

So - no matter how badly landlords may consider that they are treated in a CVA, the reality is that at least one alternative to a CVA actually has the potential to treat them worse.