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Administration is no better for creditors than receivership

Date: 8th October, 2007   |   Author: Chris Laughton   |   Comments: 3

In a post on an academic US blog about credit and bankruptcy, Credit Slips: Corporate Bankruptcy Costs and Recoveries in the UK, John Armour points out the results of his research into whether creditor control is better concentrated in the hands of a single creditor (receivership) or creditors generally (administration).

He concludes that there is no net difference as a result of two opposing factors:
there are higher gross realisations in administrations - due, Armour suggests, to higher accountability to junior creditors incentivising administrators to maximise realisations;

but dispersed creditor governance allows administrators to charge retail fee rates rather than the lower wholesale rates negotiated by secured creditors.
Intuitively, the explanation of higher administration realisations works at the margins. An administrator has a statutory priority of objectives and "getting the bank out" is last (as opposed to being the sole objective in receiverships).

But the retail/wholesale fees rationale is less persuasive. Bank panel firms are not always able simply to abandon wholesale rates once the bank is repaid. The fact is that administrations, with their heavier burden of broad obligations to creditors, including significant additional statutory reporting and compliance requirements, and a primary duty to have the company and its business continue as a going concern if possible, are simply more complex and costly procedures than receiverships.

 

Discussion and Comments

By Paul C on Friday 26th October, 2007

As everyone knows in the profession, administration is used by some less scrupulous practitioners as an alternative to CVL - a good way to get appointed without the hassle of a creditors meeting up front (or at all).

Intuitively, a typical CVL ought generally to have lower net realisations than a typical receivership, and so perhaps this phenomenon is skewing the results?

By Chris Laughton on Friday 26th October, 2007

Paul

What I think you’re suggesting is that some of the administrations in the sample ought to have been CVLs, which if excluded would have led to an overall result in favour of administration, notwithstanding the higher costs of administration.

“We found that, consistent with predictions, the gross realisations from bankruptcy sales increased under the new law, controlling for a number of other factors such as size, duration, industry, and sale type. The intuition here is that accountability to junior creditors gives administators better incentives to maximise realisation values than receivers have, accountable only to senior creditors. This was borne out by a further test that showed that all the difference between the old and new law was occurring in cases where the senior creditor was oversecured.”

The final sentence above is key - “less scrupulous practitioners” (in the sense you mean) tend not to be acting where the bank is oversecured.

By Paul C on Saturday 27th October, 2007

Interestingly, that was one part of the post that emprically I didn’t recognise.

Are administrators’ minds more focused simply because they are more accountable (in theory) to junior creditors?  I don’t buy his intuition, nor do I see it.

As an aside, I wonder if the difference between old-Act admin and new-Act admin was so pronounced?

 

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