#10443 - Administration - BPC Corporate Insolvency

Corporate Rescue – Administration

Rescue ideology

When does rescue occur?

Economic distress - means the business itself is just not viable any more for any number of reasons e.g. company is a loser – nobody wants to buy the company’s products or competition has become too fierce in the market. So Darwinian cull of these companies and re-allocation of resources to those able to use them productively.

Financial distress - means the business remains viable, but financial difficulties are due to external forces rather than poor management or business e.g. loss of customer, credit crunch, badly structured debt E.g. IMO Carwash group.

Rescue as of right?

US – Company themselves file for Chapter 11 so arguably something of a rescue as of right.

Belcher says leaving decision to them could be flawed as a policy, because management in times of trouble have tendency not to act rationally.

UK – Selective rescue determined by the market, as liquidation may be appropriate in some cases But note this essentially means death for the company)(Argenti). We should regulate failure, not prevent it. Cork Report – society is only interested in preservation of viable economic enterprises which contribute to economic life of the country.

UK more of a feeling that directors responsible for the mess so don’t leave them in control.

So in UK deserving case often identified by company’s institutional lender who will be monitoring company for some time.

Who runs the rescue?

US – Debtor in possession

UK – Independent control

But not so very different - McCormack says in many Chapter 11 cases the existing management of company might initiate procedure, but find themselves out of a job during procedure and often as a condition of creditor support.

What is ‘rescue’?

• ‘Pure rescue’ –Company itself is subject of formal intervention and at the end of that, the company emerges intact and is restored to financial viability – workforce, activity remains intact, and most importantly shareholders are same people before and after.

• ‘Partial rescue’ – Company’s activities are in some way modified or rescued to a ‘core’. May be some job losses including maybe senior management/directors. But ownership of company unchanged – shareholders.

• ‘Corporate recycling’ – The company’s business/activity or a viable part of that business is sold as a going concern to a 3^rd party - thus removed from original owners/shareholders. You will usually raise more money from this than if you sell company’s assets separately – certain synergy between constituent parts of business – intangible valuable assets are part of the business e.g. goodwill, contracts, even telephone numbers etc altogether add value. If we can see selling the business as a ‘rescue’ then English law really does facilitate rescue

This latter approach is the most common.

Rescue procedures in the UK

Insolvency Service seems to now accept that when we talk about corporate rescue we also mean business rescue.

Various procedures:

• Turnaround/workout

• Company voluntary arrangements (‘CVA’s)

• Administrative receivership

• Administration

Administrative receivership: Part III Insolvency Act 1986

Receivership emerged due to mortgage law – always been the case that parties could agree that mortgagee could appoint a receiver who would take over management, try and generate profits etc. Imported into secured lending so debenture holders/secured lenders would make it a condition that they could appoint receiver.

Emerged as a rescue device.

But receivership basically constituted a mechanism for the enforcement of a security interest held by a particular creditor under a floating charge- which often covers a lot of the company’s property.

Indeed, difficulty with receivership was administrative receiver’s primary duty was to look after interests of his appointer (the secured creditor), not the company’s interests or interests of its general unsecured creditors.

This led to Enterprise Act 2002 and prospective abolition of administrative receivership because what was wanted was collective proceedings where all creditors can look to office-holder.

S72A(1) IA – Holder of qualifying floating charge may not appoint administrative receiver of company.

S72B-GG contains specific exceptions to this e.g. capital markets, public/private partnerships, utility projects, financed projects, financial market transactions and registered social landlords.

S72A(4)(a) This abolition operates with prospective effect only – where floating charge granted on or after appointed date of 15^th September 2003.

Administration

Lord Browne-Wilkinson in Powdrill first recommended administration as rescue procedure.

Later promoted as ‘the’ rescue procedure 17 years later.

Problems post-1986 was hardly anyone took up administration at first because most secured lenders would rather appoint receiver to look after own interests first.

Administration was also initially too cumbersome, costly and almost everything required a court order.

Hence receivership restricted, and administration used more as financial institutions lobbied and extracted some concessions re the procedure – it became more streamlined via Schedule B1 e.g. floating charge-holder can appoint administrator out of court, company itself can appoint administrator out of court, pre-packs seem to be available, etc.

The administration procedure

Essentially, because administration is designed to make one crisis organ accountable to the creditors as a whole, it will often be impossible to satisfy everyone because different creditors (particularly different classes of creditor) will usually have different vested interests - difficult problems of trade-off between the interests of secured and unsecured creditors and no-one can be entirely satisfied.

Is there deference to administrator’s view? Is this appropriate?

The courts have shown themselves to be reluctant to second guess commercial decisions that are made in difficult corporate circumstances – much deference.

This is probably a good thing as problems would clearly arise if we began to ask the courts to make complex commercial decisions beyond the parameters of their expertise. This is somewhat similar to the debate about judicial deference to doctor’s views via the Bolam test – a practice I also condone.

Plus the legislation clearly intended this – for instance the wording of para 3 B1 talks about what the administrator ‘thinks is practicable’.

Appointing an administrator:

Para 10 B1 onwards – Go to court

Para 14 B1 onwards – Appointment by qualifying floating-charge holder

Para14(2) and (3) defines qualifying floating charge holder - if you hold a charge or combination of charges over whole or substantially whole of company’s property and you state that your charge is qualifying, you can make an appointment under para 14.

Note that for floating charge-holder to appoint administrator (unlike company or directors below), the company does not have to be insolvent or likely to become insolvent

Rescue-driven device which is good because it enables steps to be taken before company’s financial positions has become critical.

Note often the floating charge-holders are banks, but they will often influence the company/directors into appointing an appropriate administrator instead of them doing it themselves here due to their reputation – they don’t want to be seen to be putting a company into administration. But they are prob best-placed to appoint because they have monitored the company.

Para 22 B1 onwards – Appointment by company directors

In short, whilst expedited appointment by the directors is a useful innovation of the 2002 Act, it cannot be expected to be the main gateway to administration – evidence shows that while this was intended so that the company could be saved earlier, this probably hasn’t worked.

The purpose of administration:

Para 3(1) Schedule B1 gives hierarchy of objectives applying to all administrations:

1. Rescuing company as going concern, or

Rare – quickly jettisoned. Only realistic way of achieving corporate rescue is to couple it with use of a CVA (burdensome). Usually consultations with practitioners occur too late for this.

2. Achieving better result for creditors than if company wound up, or

This is a lower hurdle and is easier – e.g. can recycle business, or trade on for a while e.g. complete contracts and collect book debts for creditors (easier in administration than liquidation). Administrators have lots of statutory tools to do this

(c) Realising property to make distribution to 1 or more secured or preferential creditors

Para 3(3) Administrator must perform functions with objective specifies in (1)(a) unless not reasonably practicable, or unless (1)(b) would achieve better result.

Note this places interests of creditors above rescue of company unless the 2 coincide.

Para 3(4) Can only pursue (1)(c) objective if he thinks it is not reasonably practicable to achieve objectives in (1)(a) or (b) and he does not unnecessarily harm the interests of the creditors as a whole.

At this point, in reality, administrator will choose one of these, but projected onto this are considerations made in introduction procedure which precedes appointment (here pre-pack will be considered).

Administrator will use mainly commercial considerations to decide which course of actions to take: Viable business? State of finances? Effect of publicising insolvency on e.g. goodwill? Executor contracts which should be completed to generate cash? (but will the money generated offset the costs of trading and more to make it worthwhile?) Costs of trading on?

...