The rapid onset of the COVID-19 pandemic, coupled with the drastic lockdown restrictions, has left many businesses – particularly those that rely on heavy footfall – in dire financial circumstances.
Businesses are therefore seeking tools to help them weather this storm and light-touch administration is an option that continues to rear its head.
What is it?
Administration is a statutory process whereby an insolvent company (or one that is on the brink of insolvency) has administrators appointed over it, who are obliged to pursue one of three statutory objectives. The first objective is the rescue of the company as an ongoing concern; however, in reality, this is often unachievable. By default, the second objective is more frequently pursued to achieve value for creditors, by the sale of the company’s business and assets and then exiting into liquidation or dissolution.
Although often referred to as a ‘new’ insolvency process, light-touch administration has been around since the introduction of the Insolvency Act 1986 and is really just a re-purposing of the existing administration regime. It differs from conventional administration in one key respect – namely, that the administrators consent to the directors continuing to exercise their management functions and remaining in control of the company following their appointment (within agreed parameters). This clearly is appropriate only in circumstances where there is a realistic prospect of achieving the rescue of the company and the company’s failings are not due to the incumbent board’s mismanagement.
What are the benefits?
One of the real benefits of all administrations – including the light-touch flavour – is that the company enjoys a wide-ranging moratorium on creditor and other enforcement action, giving it much needed breathing space.
Where appropriate, it can work well. The directors know the business and are perhaps best-placed to navigate the challenging economic circumstances presented by the COVID-19 pandemic while not having to worry about creditor obligations thanks to the moratorium. In addition to maintaining a degree of business continuity, the costs associated with a light-touch administration are also likely to be considerably lower than other administrations, since the administrators will be carrying out only minimal essential functions, rather than running the company on a day-to-day basis pending a sale.
The administrators are still ultimately responsible for the company and it is critical that robust monitoring is in place to ensure directors do not exceed the agreed parameters of their powers. The directors also need to ensure that they comply at all times with their duties pursuant to the Companies Act 2006.
Will it work?
It may not be the solution in all cases. However, it will be interesting to see if the early adopters of light-touch administration, such as Debenhams, can be rescued when temporary COVID-19 measures introduced by the government have ended. Such measures include the employee furlough scheme, deferral of tax liabilities and restrictions on use of winding up petitions. When these are wound up, many businesses will have to deal with the true economic fallout of COVID-19. At this point, will the rescue of the company even be an option?
First published on Food Manufacture. Reproduced with permission.