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Light touch administrations – the way forward?

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Posted by Caroline Benfield on 24 April 2020

Caroline Benfield - Insolvency Lawyer
Caroline Benfield Partner

When the prospect of lockdown in the UK started to look like a reality, much was written and discussed about the flood of insolvencies that would inevitably follow.  Whilst most office based professional service businesses could probably adapt with staff working from home, how could shops and restaurants possibly survive this?  Surely there would be an avalanche of work for IPs and insolvency lawyers.  Some of these businesses were struggling to begin with the travails of the high street and casual dining market being well documented but what about those businesses that were thriving?  Administration could only operate as a rescue process for these businesses if there were purchasers out there willing and able to pay cash for the business and assets and who would be willing to do so during lockdown with so much uncertainly about how the world will look when lockdown is lifted?

Two significant developments then occurred.  The Chancellor announced the employee furlough scheme and on 25 March 2020 the Coronavirus Act 2020 came into force pursuant to which forfeiture of commercial leases for non-payment of rent was banned.  Thus the concepts of mothballing and  “light touch administration” came to the fore.  The second administration of Debenhams on 9 April 2020 was the first high profile case where the intended strategy included both of these concepts.  The majority of staff were furloughed, the stores closed, negotiations with landlords commenced and the directors would be left running the online business.  Debenhams was of course already in a CVA but would be unlikely to be able to comply with the terms once its stores were forced to close and therefore a moratorium was required to prevent creditor action.

However, this strategy presents significant risks and uncertainties for the IP and the directors.  In normal circumstances, the administrators would be liable to pay rent as an expense for premises that were being occupied for the benefit of the administration.  What therefore is the status of those retail stores that have been closed pending a final decision being taken as to their future once lockdown is lifted?  Presumably the administrators are not going to empty them all and store all the stock off site at significant cost.  As such they will not be able to evidence a lack of occupation.  If rent is payable as an expense, how will this be paid in the case of those businesses without an online presence to generate income?  It therefore seems likely that we can expect some judicial guidance on this issue in the not too distant future.

So far as the light touch approach is concerned, many IPs are likely to feel uncomfortable and exposed.  Under paragraphs 67 and 68 of Schedule B1 an administrator must take into his custody and control all property to which the company appears entitled and he must manage the affairs of the company in accordance with his proposals.  Whilst the proposals may state that the directors are to manage the day to day business there is no getting away from the fact that the administrator is required to manage the affairs of the company and he may not abrogate that duty.  Therefore, if things do go badly wrong during this period of light touch management the administrators are unlikely to be able to avoid liability for breach of duty not to mention the risk of disciplinary proceedings by their regulator. 

These risks can and should be mitigated by putting in place limits to the directors’ powers in terms of access to company funds.  The status of the company prior to the coronavirus pandemic may be relevant to the extent of these limits.  In the case of those businesses that were being run successfully by the existing management team until they were forced to close, a more relaxed approach presents less risk than those cases where the business was already financially distressed.

The Insolvency Lawyers Association and City of London Law Society have issued a pro forma consent for use where administrators wish to allow directors to exercise management powers while the company is in administration.

Under paragraph 64 of Schedule B1, directors cannot exercise management powers without the administrators' consent and this is rarely given because of the duties mentioned above under paragraphs 67 and 68.  However, where a company's difficulties stem solely from the lockdown, consent may be appropriate because of the consequent cost savings.  Under the terms of the pro-forma consent, the administrators would conduct a light-touch administration, undertaking only essential duties and supervising the directors' attempts to rescue the company as a going concern.

The pro-forma envisages that limits will be placed on the spending powers of the directors in a range of circumstances and the consent is subject to a list of express conditions.  Essentially the pro-forma envisages that consent should only be given where administrators are satisfied that the company can be rescued as a going concern and has sufficient working capital to pay key post-administration costs and expenses such as rent, employee salaries, utilities and suppliers on an ongoing basis.

Regardless of the extent of the management powers granted to them under the pro-forma or otherwise, directors’ duties under sections 171-177 of the companies Act 2006 continue notwithstanding the administration (Systems Building Services Group Ltd [2020] EWHC 54(ch)).  This means that the directors must continue to promote the success of the company, exercise independent judgment, exercise reasonable care, skill and diligence and avoid conflicts of interest whist managing the company in administration.  Should they breach any of these duties they can be held liable to compensate the company although it seems unlikely in this scenario that the administrators could themselves avoid liability for misfeasance and breach of duty for allowing the directors’ breach to occur when they ought to have been supervising the directors, especially given that they are more likely to have insurance in place to call upon.

We are currently in uncharted territory with regard to so-called light touch administrations and it remains to be seen how the courts will deal with those cases where the management powers were granted to directors under the pro-forma consent or otherwise in circumstances where things ultimately go wrong.

About the author

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

Caroline Benfield

Caroline advises on all aspects of contentious and non-contentious personal and corporate insolvency matters.

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