Will light touch administration save the high street?

The shockwaves of COVID-19 have been felt in all aspects of industry, but the retail sector appears, so far, to be particularly vulnerable to the economic consequences of social distancing measures.

UK supermarkets are anticipated to fare well out of the crisis, but the "High Street" retail sector expects to see £12.6 billion wiped from its sales, with a return to 'normal' not anticipated until October 2020, at least.

In these challenging times, we have seen many industries innovate to try and combat the impact of the virus on our lives and the insolvency profession is no different.

In an attempt to ensure that as many businesses as possible survive, Mark Phillips QC has devised a process that would allow companies in financial distress to enter into administration, affording them the protection of the statutory moratorium, but keeping the cost of administration to a minimum and the company in the hands of its management.

His innovation, dubbed "light touch administration" has been welcomed by the Insolvency Lawyers Association and City of London Law Society.

Administration procedure

Administration is a restructuring process, which is regulated by Schedule B1 to the Insolvency Act 1986 (the 1986 Act).

It was introduced (in its current form) in 2003 and was designed to be a tool to help promote a rescue culture, in the UK, for businesses in financial distress. Key to the success of administration is the powerful statutory moratorium, which gives a company "breathing space" and protection from its creditors, while in administration.

This principle of rescuing business is at the heart of the regime and enshrined into statute in paragraph 3 of Schedule B1 of the 1986 Act, which provides that:

"the administrator of a company must perform his functions with the objective of –

(a)rescuing the company as a going concern, or;

(b)achieving a better result for the company's creditors as a whole than would be likely if the company were wound-up (without first being in administration), or;

(c)realising property in order to make a distribution to one or more secured or preferential creditors."

In administration an insolvency practitioner is appointed to realise the assets of the company, with a view to making a distribution to the company's creditors.

Once the administrator is appointed, the company's directors are stripped of their management powers, with the administrator taking control of the company and its assets for the benefit of the company's creditors.

"Light touch administration" interrupts that normal pattern, allowing the company's management to retain control, with the permission of the administrator, but crucially with the latter taking a "hands-off" approach. This is achieved by invoking the powers available to an administrator under paragraph 64 of Schedule B1 of the 1986 Act, which provides:

"a company in Administration or an Officer of a company in Administration may not exercise a management power without the consent of the Administrator."

In essence, therefore, light touch administration empowers the company's directors to act as the administrator's agent, to run the company on a day-to-day basis.

Benefits of a light touch administration

The principal benefit of light touch administration is that it keeps the costs of the administration down, by allowing the administrator to fulfil essential functions only and essentially have a supervisory or project manager role.

This approach is not, however, without risk. Where an administrator uses this power, they will be personally liable for the actions of the directors/company's management. As a result, light touch administration is designed to ensure that limits are set on the delegated authority given by the administrator.

Delegated authority in this context refers to delegation of day-to-day management rather than the administrator's statutory powers.

In practice, the extent of any delegated authority has to be set out very clearly because ultimate responsibility lies with the administrator, who will be answerable to creditors (and the court) in relation to the decisions they have taken.

Given the exposure to personal liability, and their special status as an officer of the court, an administrator should think carefully about whether to use light touch administration and allow the company's management to remain in charge of the reins.

Where a company was in financial distress pre-COVID-19, an insolvency practitioner would have to question whether a light touch approach is appropriate. Of paramount consideration will be the ability to demonstrate that this will enable a company to survive, and be rescued.

The attitude of stakeholders, such as lenders, landlords, employees etc are also likely to be highly relevant when considering whether to adopt a light touch approach.

How long will this last?

Light touch administrations are a temporary fix to what we hope will be a temporary crisis.

Sectors that were already under pressure prior to COVID-19 need all the help they can get; light touch administration could be that lifeline and the difference between survival and failure.

Time will tell whether this process will help. Regardless of the outcome, the flexibility and ingenuity of the insolvency profession must be commended in finding ways to help our economy recover when doors open for business again.

Listen to Real Estate Partner Elaine Petterson and Banking Partner Lucy McCann discuss 5 key points about light touch administrations: