Coronavirus (COVID-19) – rescue and 'light touch' administration... an option for good businesses endeavouring to weather the crisis

Administration, a process under the Insolvency Act 1986, has a reputation that is typically associated with decline and failure. Directors, shareholders, and other stakeholders fear the stigma that an administration (or other insolvency process) might carry.

In recent years, creditors have heaped opprobrium on pre-pack administration sales (i.e. an arrangement whereby the sale of all or part of a company's business and/or assets is negotiated and agreed before an administrator is appointed. The relevant documentation is then signed and implemented immediately, or shortly after, the appointment is made) and their corollary, the “phoenix company” (i.e. a company incorporated, usually by the directors and/or shareholders of a company in administration, for the purpose of buying the pre-pack business).

While administration can be the culmination of mismanagement and/or sharp practice, it would be wrong to throw the baby out with the bathwater. While administration's bad reputation is, in some instances, richly deserved, that is a consequence of how it can be used (and misused). For the most part, administration is just misunderstood.

The purpose of this article is to defend administration as a process (when properly used), and also to explain how it might be used in a different way, in order to help good businesses weather the exceptional challenges of the Coronavirus (COVID-19) crisis.

The Insolvency Act 1986, which introduced the administration procedure, was the first wave of “rescue culture” insolvency reform. The Enterprise Act 2002, which substantially revised and enhanced the administration procedure, was the second wave. Administration was intended to give companies a breathing space in which they could sort out solvency issues.

The administrator of a company must perform his/her functions with the objective of (a) rescuing the company as a going concern, or (if that is not possible) (b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or (if that is not possible) (c) realising property in order to make a distribution to one or more secured or preferential creditors.

In ordinary circumstances, usually because the company's problems are so manifest that it cannot be rescued in its current form, an administrator will perform his/her functions to achieve one of the subordinate objectives (i.e. a better result for the company's creditors as a whole or realising property).

The COVID-19 pandemic has presented unique, but let us hope short-term, challenges. The Government has introduced various temporary measures to assist businesses, albeit, for a number of reasons, companies cannot always access them (at least, not quickly), and/or there are gaps in their applicability.

In our view, particularly under these exceptional conditions, directors and other stakeholders should not view administration with suspicion, but as part of the rescue toolkit at their disposal to assist them in weathering the storm.

Below, we explain what administration does and can achieve. Critically, an administration does not have to mean company directors divesting themselves of power, and losing control of their business, or the disposal of its assets. Administration can be a temporary (rather than a terminal) procedure.

The directors or shareholders of, or certain lenders to, an insolvent company can initiate an administration. The company must be insolvent, that is to say, it is unable to pay its debts. The appointment can be made out of court. From the commencement of the process, a company in administration will have the benefit of a moratorium on any legal claims against it, allowing breathing space for an administrator to carry out his/her functions. That is significantly broader than the temporary protection from landlord re-entry/forfeiture recently introduced by the Government. Making an administration filing can, therefore, be a crucial step where creditors (landlords and others) are threatening enforcement action.

An administration can end in a winding-up, but it can also end in a solvent exit. Such an exit could be combined with a company voluntary arrangement (CVA) or scheme of arrangement to compromise creditor liabilities or otherwise restructure the business, in either case formulated under the protection of the moratorium. As readers may be aware, it is common (indeed, it is necessary under the “football creditors rule”) for football clubs to exit administration via a CVA. There are other examples of companies making solvent exits from administration.

A director of a company in administration may not exercise a management power without the consent of the administrator. In an “ordinary” administration, that consent is rarely given. However, in the Coronavirus (COVID-19) crisis there is an increasing prevalence of “light touch” administrations (Debenhams is perhaps the most headline-grabbing example, and pre COVID-19 examples include Railtrack and Metronet). This is where broad consents are given to directors of the company, so that they can continue to operate the business, with oversight from the administration.

Now, learned practitioners, Mark Phillips QC, Stephen Robins and William Willson of South Square, have drafted a consent protocol agreement (in consultation with the Insolvency Lawyers Association and the City of London Law Society) to allow the directors of a company in administration to continue running its day-to-day business within the thresholds, obligations, and checks and balances set out in that agreement. Our hope is that the protocol will be widely adopted as the blueprint for “light touch” administrations.

While in this article we have presented administration (and in particular “light touch” administration) as an attractive option, it will not be appropriate in all circumstances. Moreover, while the Government has confirmed that the Coronavirus Job Retention Scheme is available to companies in administration, the availability of other reliefs, taking just two examples, the Coronavirus Business Interruption Loan Scheme (CBILS) and Retail, Hospitality and Leisure Grant Scheme (RHLG) is not confirmed. Careful engagement with your advisors will be necessary in each case.

Finally, we must note that “light touch” administrations are not without risk for administrators. In a recent matter, the joint administrators conducting a “light touch” administration were held to have failed to exercise independent judgment and instead paid excessive regard to the interests and wishes of the lender which had appointed them. Therefore, administrators will approach them with caution.

If you would like to discuss any of the issues raised in this article, or have other concerns about the impact of Coronavirus, please contact Douglas Hawthorn, Sacha Pickering or Karen Williams in Michelmores' Restructuring & Insolvency team.

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This article is for information purposes only and is not a substitute for legal advice and should not be relied upon as such. Please contact our specialist lawyers to discuss any issues you are facing.