In light of the current financial difficulties facing many companies as a result of the coronavirus pandemic, the insolvency profession has been looking at the concept of 'light touch' administration as a way to meet those financial difficulties.
Why is a lighter touch more appealing?
Administration is often the most appropriate and effective insolvency process by which to save some or all of the business of a company. One of the reasons for this is that administration offers companies the protection of a moratorium from action by creditors. That moratorium provides breathing space to the company to find a rescue strategy.
However, once a company enters administration its directors lose control of the business, which is then in the hands of the administrator. That is where the different concept of 'light touch' administration comes in, as a way in which the administrator gives certain management powers to the directors and management team. This enables the directors and management team to remain in place, to deal with the day-to-day running of the company under the direct control and supervision of the administrators.
As well as allowing the directors and management team to continue to maintain operational control, light touch administrations can often be more cost-effective than regular administrations. The administrators’ costs can be significantly reduced, due to their reduced involvement in the company’s operations, and the process as a whole can be streamlined.
This explains why there are currently a number of companies, mainly based within the retail and restaurant sectors, looking to take advantage of this new form of administration. Most notably, Debenhams became the first high street business to enter into a 'light touch' administration in early April. The rationale behind this decision is that a company can either maintain or mothball its business, with the aim of a rescue solution being found once the financial difficulties caused by the coronavirus pandemic have eased.
What's the catch?
It is fair to say that light touch administrations can raise specific concerns for insolvency practitioners, and can often have increased risks in respect of breach of duty and personal liability claims. Due to the nature of light touch administrations, administrators retain the same level of responsibilities and duties as in regular administrations but with less control. Insolvency practitioners could be held personally liable for management decisions made by company directors during the administration. KPMG, being the supervisors of Debenhams’ Company Voluntary Arrangement in 2019, declined to be involved in the retailer's 'light touch' administration due to the potential risks associated with the process.
It is to be hoped that 'light touch' administrations may start to be used more widely to try to save companies experiencing cash flow issues arising from Covid-19. That said, not all companies are capable of rescue; if a company was experiencing significant debt issues before the Covid-19 pandemic, it is questionable whether or not a 'light touch' administration would be appropriate in the circumstances.
'Light touch' administrations are based on interpreting current insolvency legislation, which allows for administrators to consent to directors exercising certain powers. Whilst we await specific legislative guidance for light touch administrations, the concept has recently been given judicial approval in the case of Re Carluccio’s (In Administration) EWHC 886 (Ch). Mr Justice Snowdon made it clear that the current insolvency legislation should be interpreted to "support the rescue culture and the Government’s efforts to deal with the economic consequences of the COVID-19 pandemic."
The Government has announced it is proposing new restructuring tools and measures which would offer struggling companies alternatives to the insolvency processes currently available. However, until further details of such reforms are announced, many companies may choose 'light touch' administrations in light of the serious financial problems so many are currently facing.