‘Light Touch’ Administrations: A new approach to an old remedy
August 4, 2020
It may have taken almost twenty years, but the insolvency profession has finally got round to adapting the Administration insolvency process brought in by the 2002 Enterprise Act to reflect changing public attitudes towards the exercise of creditor power in business rescue.
There is a certain irony that the sudden interest in so called ‘Light Touch’ Administrations has been prompted by the agreement between the struggling department store chain, Debenhams and its Administrators to carve up ongoing management responsibilities in a radical new way. This is Debenhams’ second Administration in just over a year, in between which it used the Company Voluntary Arrangement (CVA) procedure to reduce its store portfolio.
The cost of Administration
The other issue, which this new approach may be able to address is the mounting criticism of the high cost of Administration. It was originally designed as a restructuring tool aimed at preserving both the business and its value, not an asset realisation exercise during which large amounts of scarce financial resource are spent on professional fees for the Administrators and the various experts they hire to plug the gaps left by the displaced management.
It needs to be made clear at the outset that ‘Light Touch’ Administration should not be confused with the recent announcement from the UK Government on changes to insolvency legislation. As well as a suspension of the wrongful trading rules, there is a new Moratorium procedure, which will give solvent but challenged companies a brief period to restructure and to try to avoid falling into insolvency.
What is ‘Light Touch’ Administration?
So ‘Light Touch’ Administration is not a new procedure. Instead, it is a novel way of using the current insolvency regime in a way that has not been widely used before. It has been seen in the past in a small number of high profile Administrations, but now it is being suggested as a tool to be used more widely and in particular, to help businesses of all sizes get through the current crises.
The concept is based on applying flexibility to paragraph 64 of Schedule B1 to the Insolvency Act 1986, which prevents a company in Administration or its directors from exercising any management powers without the consent of the Administrators. In this new light touch strategy, the Administrators effectively give this consent to the company’s directors to exercise certain powers within agreed parameters, enabling them to continue to run the day to day management of the business, but with a clear oversight role played by the Administrators.
What is the difference between ‘Light Touch’ and normal Administration?
The result is that a company would still go into Administration in the usual way and would still be subject to the same insolvency rules and controls, but with the key difference that its management would not be removed as usually happens in traditional style cases. The theory is that the company would have the benefit of protection from creditors under the procedure, but that the management will be empowered to use their skills to steer the business safely out of Administration, either through some form of re-financing or perhaps a sale to new owners.
What is not altered is that the Administrators still have ultimate responsibility for the company’s actions, particularly to ensure that its affairs are managed in the best interests of the general body of creditors and that it complies at all times with insolvency and other relevant legislation. Whatever the arrangements between them and the management, the Administrators must stay in complete overall control and keep themselves sufficiently well informed at all times so that they know when and if they should step in to vary or terminate their delegated consent at any time.
The circumstances in each business will be different but broadly speaking, Administrators will need to put in place robust checks and balances with a clear escalation process so that all management levels operate within their agreed scope of decision making. The management delegation framework will change as the Administrators and management learn what works and what does not.
A key element for all involved will be a clear business plan, which covers both ongoing operations during the Administration and an agreed road map leading to an exit from the process. Compliance with this plan will have to constantly be monitored. Ensuring that sufficient funding or guarantees are in place will be a major part of the plan.
When is ‘Light Touch’ Administration used?
‘Light Touch’ Administration will not be suitable for all businesses. Administrators will only agree to it where they have a reasonable belief that the company can ultimately be rescued as a going concern and exit Administration. As such for example, it potentially suits businesses facing severe financial stress due to forced temporary closure under the Covid-19 lockdown, but which are otherwise viable.
The financial distress faced currently by many businesses will in the vast majority of cases not be down to poor decisions by the directors, but instead the exceptional circumstances resulting from the pandemic will be to blame. Where this is the case, the directors working under the guidance and control of the Administrators are surely most likely to be the right people to stabilise the company, which will ultimately achieve the best outcome for creditors and other stakeholders such as the employees.
The attractions for the company and the management are obvious. Despite originally being conceived as a rescue procedure, these days Administration is now much more associated in people’s minds with business failure. The light touch approach is a positive step back towards business rescue. Management teams will hope that this change of emphasis will go some way towards neutralising the stigma attached to Administration.
It should also mean cost reductions, although it will remain to be seen just how significant these will be. Whilst the salaries and costs of retaining management should in most cases be lower than the fees of outside experts, nevertheless the Administrators will still need to take independent advice from time to time on aspects of the conduct of the case.
What does this mean for businesses?
Light touch Administration creates the opportunity to maintain continuity of business, while creating essential breathing space from creditor enforcement action, thereby protecting the business and allowing it to exit Administration as a going concern. Nobody should think that this is an easy route, but it offers significant advantages over the alternatives of so many traditional terminal Administrations, which lead only to the break-up of the business, the dispersal of its assets and eventually to Liquidation.