On a company entering administration it’s not uncommon for the directors to be side-lined. The law provides that the administrator has a duty to manage the company’s affairs, business and property and no director may exercise a management power without the consent of the administrator.
But as a situational specialist an administrator is well placed to manage at a high level, deal with the impact of administration on the company and consent to the company’s management conducting day to day operations. Company managers and directors frequently have relevant industry skills and experience that administrators do not.
How can the relationship between the administrator and a company’s directors be arranged to make best use of their respective skills and experience? Well, it’s for the administrator to decide what’s in creditors’ best interests in each case, but the prospect of viable businesses needing the protection of administration to enable them to restructure and overcome the three months or more of closure forced on them by the coronavirus pandemic stimulated the development of a useful tool.
In April 2020 the Insolvency Lawyers Association and the City of London Law Society produced a consent protocol. The main features of this template are the identification of broad management powers which can continue to be exercised by the directors and the identification of specific conditions with which the directors must comply in order to exercise those powers. Where the primary objective of an administration is to rescue the company as a going concern, the consent protocol is intended to provide a framework to allow the directors to play a central role in stabilising and rescuing the company under the administrator’s supervision. Cases where the protocol is adopted have been dubbed ‘light touch’ administrations.
To date there have been at least two high profile light touch administrations, Debenhams and Victoria’s Secret. While a recent announcement by the administrator of Victoria’s Secret stated that an agreement had been reached with another retailer to sell parts of the business, the detail within the administrators’ reports to creditors will indicate to what extent the management were permitted to remain in office and whether there has been a genuine cost saving.
The protocol is an eminently sensible idea. In practice I have adopted similar protocols on trading administrations historically and thanks to the lawyers and insolvency practitioners who developed the idea, we’re now even better placed with a template protocol available for use in future situations.
While the administrator has the ability to delegate management (but not the administrator’s own) powers to a director, it is the administrator who retains responsibility. The extent to which a light touch administration can remain ‘light touch’ is therefore dependent on a number of factors, first amongst which is the level of trust between the administrator and the board, as well as the reliability of management information, and the speed with which it can be produced.
Other stakeholders sometimes see the directors as part of the problem for an insolvent company, but these are not normal times. Good businesses have hit rock bottom through no fault of their own. The pandemic has affected the global economy and the protection of the administration moratorium should not be outweighed by the cost of oversight of the administrators.
The light touch administration protocol does not claim to be a one size fits all remedy but alongside the new moratorium, the restructuring plan, company voluntary arrangements and more traditional trading or pre-pack administrations, it provides the UK restructuring and business community with a range of tools with which to fight the spiralling corporate debt pile, and crucially to help get British business moving again.
At Mercer & Hole we have always sought to identify the most appropriate solution for each individual business which requires the assistance of our corporate restructuring team and we welcome the expansion of the toolkit to allow us to play our part in the recovery of UK Plc.