Typically the UK's administration procedure is regarded as a destination of last resort for companies that have failed. Headlines condemn companies for "collapsing into administration", much as they once lamented "calling in the receivers". Unlike in the US where chapter 11 is viewed positively as a reorganizational tool, directors in the UK are advised to seek to avoid the stigma of insolvency that attaches to administration if at all possible. However, this misses the fundamental point that administration is much more flexible than this. We at Ashurst think its full potential is yet to be realised. With our country, and a quarter of the world's population, in lock-down, we are all having to learn to work with what we already have. Here is how Rescue Administration can save livelihoods:
- Rescue Administration can be used as a flexible rescue tool for companies suffering unprecedented liquidity issues as a result of the COVID crisis. Any administration's primary statutory purpose is rescue of the company as a going concern but this purpose has to date seldom been pursued. There is no time like the present to change that narrative.
- Rescue Administration can be light touch, where the administrator (a qualified insolvency practitioner, expert in managing distress and operating amidst crisis) can consent to the continued management of the day to day business of the company by the existing directors, under the administrator's supervision.
- Rescue Administration can provide a breathing space for companies that need to choose carefully which essential creditors can be paid, and which ones will have to wait in line until a rescue is achieved.
- Rescue Administration can provide the opportunity to inject priority unsecured funding, repayable as an expense of the process.
- And, when our economy opens up once again at the end of the COVID crisis Rescue Administration can provide an optimal route to implement a Company Voluntary Arrangement or a Scheme of Arrangement in order to reshape the company's finances into a viable state
In other words, a Rescue Administration could be just what lots of British businesses need to navigate their way through the COVID crisis. And the beauty is that Rescue Administration already exists. It's sitting in our rescue toolkit, ready for use. There's no need for any new legislative measures. We don't need to wait for our own version of Chapter 11. We just need to be bold.
There are wrinkles that would need to be worked out, including how the government's job protection scheme, which allows employees to be furloughed, might apply in an administration (notwithstanding the announcements made to date); how rent could be treated (which would normally be an expense of an administration, but which might not work well in the exceptional circumstances of the COVID crisis); how finance creditors might be persuaded to hold off from exercising set-off rights, which are not otherwise prevented by the administration moratorium; and finally how a company in Rescue Administration might be able to access funding through some of the other government's COVID business support measures. But none of these need to be insoluble.
The UK's restructuring and insolvency professionals are renowned for their creative use of the UK's flexible regime, for successfully refashioning old tools for new purposes (such as the scheme of arrangement which was revived as a debt restructuring procedure at the beginning of this century after a lengthy period of neglect), and for working effectively with our world class judiciary to come up with neat and pragmatic solutions to awkward issues. Whatever you may think of them, insolvency legislation never contemplated "pre-packaged" administrations; our market created what was needed. There is no reason why this can't happen again. In the current market, effecting a competitive M&A process and achieving a prepack is extremely challenging and therefore Rescue Administration may offer the best opportunity to save the business.
Struggling companies are urged to look beyond the current restrictive and stigmatised view of administration. Could a Rescue Administration help to shield you or your clients' business – and their employees - from the economic consequences of COVID?
For more detail on how a Rescue Administration can work, please see the Insolvency Lawyers' Association paper: Changing the narrative around administration. https://www.ilauk.com/news-events/news-view/changing-the-narrative-around-administration
If you wish to discuss how a Rescue Administration could help your company, please speak to your usual Ashurst contact or any of the contacts listed below.
