The use of 'light touch' administration
A report in the Financial Times on 16 April 2020 suggested that:
‘Dozens of UK retailers and restaurant chains are in talks to take advantage of an experimental “light touch” administration that is intended to protect companies from creditors during the coronavirus pandemic. Department store chain Debenhams, which has 142 stores and more than £1bn of annual sales, last week became the first high-street business to enter into such a process. A light-touch mechanism allows company directors to file for administration but retain day-to-day control, rather than ceding power to insolvency practitioners’.
This ‘light touch administration’ isn’t a new process; it’s an administration, but the ‘light touch’ stems from IPs devolving management powers, or certain management powers, back to the directors under paragraph 64 (1) of schedule B1 of the Insolvency Act. That paragraph provides that ‘A company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator’.
While in practice it can be common for administrators to involve directors in ongoing trading, there is a risk that in the present lockdown scenario, IPs may end up handing too much power back to directors. ICAEW would caution its insolvency practitioners against the widespread use of this process. While it is heralded as a saviour at the present time of lockdown, there is a significant potential risk to IPs from giving too much control back to directors.
A template agreement that we have seen doesn’t necessarily cover all the practical issues that may arise, including around funding and access to bank accounts, and there may be additional risks to IPs in relation to health and safety and GDPR.
The FT article suggests that IPs have ‘received a deluge of inquiries from companies that want the light touch insolvency tool “ready to go” if government support was not granted or came too late’, and there is a risk that directors may ‘forum shop’ for an IP prepared to use this ‘light touch’ process.
The motives of some directors may be well founded, but it may be difficult for IPs at the present time to be able to make a reasoned judgement about the skills and motives of directors that they are approached by, particularly if the communication has largely been carried out remotely.
Responsibility for the conduct of any insolvency appointment falls to the officeholder and there is a significant potential risk to an IP if they commit to agreements that allow the directors to enter into transactions on their behalf. While financial limits could limit any exposure, there’s also the risk that some directors may well take advantage of the current constraints and it will be left to the IP to pick up the pieces.
With a further three week minimum period of lockdown, many small business won’t be able to continue to trade in any event, so the usefulness of this process may be limited.
On future monitoring visits we will look carefully at cases where the ‘light touch’ approach has been used, to ascertain whether the IP has exerted an appropriate level of control and oversight.
R3 members can provide advice on a range of business and personal finance issues. To find an R3 member who can help you, click below.