The Covid-19 crisis and the severe economic disruption caused by it has left many companies dealing with the prospect of an insolvency situation entirely outwith their control and through no fault of their own.
The insolvency profession is adapting to this imminent threat and the existing (albeit relatively untapped) tool of "light touch" administration has been identified as a possible means of enabling certain companies to continue through and hopefully out of the crisis. 'Light touch' administration gives a company the benefit of a statutory moratorium from creditor action while the directors continue to exercise powers to manage the business specifically granted by the administrators.
What is meant by 'light touch' administration?
'Light touch' administration makes use of paragraph 64 of Schedule B1 of the Insolvency Act 1986 prohibiting directors of a company in administration from exercising their management powers without the consent of the administrators. Up until now this consent has been sparingly given and in the ordinary course of administration the directors require to step aside leaving all operational decision making, including day-to-day running of the business, to the administrators.
The Role of Directors
Where the administrators consider that the insolvency situation has arisen as a direct result of Covid-19 and not as a result of bad decision making or inept management by the company's directors it is open to the administrators to grant consent to the directors (within strict parameters) to continue to manage the day-to-day running of the business retaining certain prescribed management powers. The administrators' focus is on a strategy aimed at preserving the long-term viability of the company and guiding the company out of administration.
Powers remaining with the directors could include:
- to pay salaries to employees;
- to acquire or dispose of stock;
- to incur credit with suppliers; and
- to make payments in respect of services.
These powers (and any other powers granted to the directors by the administrators) will be subject to financial caps determined by the administrators and will be specific to each company. They will also be subject to modification throughout the administration process and the administrators will be required to consider the continued appropriateness of any relaxations.
It is important to note that 'light touch' administration is only available for the purpose of rescuing the company as a going concern. While the company remains in administration the directors are duty bound to notify the administrators immediately where any fact or circumstance indicates that there is no longer a reasonable prospect of rescue as a going concern. Ongoing reporting to the administrators through management accounts and updates on business affairs will be an essential means of monitoring the appropriateness of continuing with the 'light touch' approach.
The reluctant administrator
There is understandable caution on the part of the administrators relinquishing or even relaxing the tight controls they generally exercise in an administration as the potential for personal liability for the costs of administration or trading losses remains with them during the administration period.
In considering whether a 'light touch' administration is possible, administrators will have difficult decisions to make in assessing the likelihood of a successful rescue, particularly in a time where the Covid-19 crisis has created many unknowns and factors entirely outwith the control of the directors or the administrators themselves. Comfort can however be taken from the fact that Courts will not rely on the benefit of hindsight as a means of second guessing the decisions made by administrators as they look to successfully navigate companies through this crisis.
It is however fair to say that administrators will only see 'light touch' administration as a feasible option where they believe that the company can be rescued and where they have confidence in the abilities of the directors to continue to play a key role in the business operations and ultimately in the rescue process.
Why take the road less travelled?
It is not an unknown or a new concept, rather it is one that has until now been an untapped resource available to administrators. The financial difficulties being faced by companies as a direct result of the Covid-19 crisis have created a very particular set of circumstances.
This potentially short-term and surmountable insolvency situation opens the door for this new approach as a means of protecting companies from their creditors as they navigate through this unforeseen and unavoidable economic crisis. Debenhams has been the first high-profile company to successfully adopt 'light touch' administration and it may be that many others will follow suit.
'Light touch' administration has the potential to achieve 4 key positives for the company and its administrators:
- it harnesses the prior knowledge and expertise of the directors who are perhaps best placed to continue to drive the business forward and maintain continuity of business;
- as well as freeing up their time it allows the administrators to focus their attentions on the immediate task in hand, of developing a rescue strategy which will guide the company back to the going concern it was pre crisis and lead it out of administration;
- it gives the company breathing spaces from its creditors with the protection of a moratorium on creditor action for the period of the administration;
- it will inevitably reduce the costs associated with the administration process.
Get in touch
Harper Macleod's team is on hand to provide specialist legal advice on your business' issues during these difficult times.
Our specialist teams across all sectors are ready, willing and able to help businesses and organisations deal with the impacts of Coronavirus – both current legal issues and preparing for what might come in the weeks ahead.
Please get in touch with a member of our team, or find out more throughout our website.