My role as an insolvency practitioner entails me working with directors to identify and then implement the least worst option for their insolvent company. I say ‘least worst’ because we do not live in a perfect world, no insolvency process ticks all the boxes, there is always a ‘hangover’. And all processes have a hangover for any buyer of the business.
Administration is a common ‘solution’ for large retail insolvencies. The House of Fraser administration has given us the opportunity to remind ourselves of what’s good and what’s bad about administration generally, and I shall also draw out some of the difficulties House of Fraser’s new owners could be having going forward as a result of the process that’s been followed. Here are the main Pros and Cons:
- Administration is a good way of writing off creditor debts that a company cannot ever hope to repay. Creditors are held back, their actions stayed, then later on their debts are written off. The appointment of the administrator can buy time to formulate a plan for reconstructing the business and/or freeing it of its debt burden. Typically this is achieved by the administrator selling on the business and assets, debt free, sometimes after some ‘pruning’ of costs / employee numbers. The additional debts created by such cost cutting by the administrator is written off as an additional unsecured debt, along with the other unsecured debts, rather than having to be met out of the company’s limited cash.
- The administrator has immense powers, he can do virtually what he wants with the company’s assets, including those owned by third parties, for example assets subject to hp, lease and reservation of title. I’ve already mentioned the potential sale of the business and assets as an option. This can be conducted after a period of trading (generally unlikely, this is discussed below) or as in House of Fraser’s case, through a pre-pack – a sale conducted immediately following the administrators’ appointment- done to enable the assets to be sold quickly and without the unsecured debt burden.
- Although the buyer of the insolvent company’s business takes on employee contacts ‘as is’ under TUPER, it does not assume responsibility for the company’s pension scheme deficit. In the House of Fraser’s case, right now the deficit is estimated at £170m, two times what Ashley paid for the business and assets.
- The combination of several of the above pros means that some jobs can often be saved.
- Without a period under the management of the administrator, often the problems that led to the company’s failure are not resolved, they remain. Any buyer of the business and assets still has a good amount of work to do to turn the business around.
- Landlords cannot, unless the buyer’s covenant is good, be forced to take an assignment of the insolvent company’s leases over to the buyer. Often – particularly in the case of retail insolvencies – the buyer would like to renegotiate completely new terms. The problem is he does not have the best negotiating position – it’s just a case of ‘mutually assured destruction’ should negotiations fail. That’s to say mere administration – if not conducted after a CVA – does not solve the problems caused by a company suffering from excessive property costs. In the House of Fraser’s case, the new owner will have to conduct a good many tough negotiations with landlords as they try to agree cheaper property costs. If those negotiations prove to be unsuccessful – there might be no business worth saving.
- As employees are typically transferred under TUPER, the buyer has to take on many of their existing terms. In those cases where the failed company has been overly generous, the buyer either has to renegotiate or terminate – whatever he chooses to do, it will be costly for him.
- The buyer of the business cannot force people to deal with them. Suppliers are hurting, they have lost money, they want payment for stocks the business is holding. They might want to charge the buyer more for supplies going forward, or refuse to offer payment terms. The buyer will have to carry out lengthy negotiations with key suppliers. The viability of the business in its new form might be in question unless those negotiations prove to be successful.
- As administration is a complex procedure, it is always a costly process. Always upwards of £20,000 for even the smallest business, administration is not an appropriate solution for small insolvencies for costs reasons, even if there are commercial reasons making it so.
- Like all insolvency processes, some business value is lost. In the House of Fraser’s case, the banks and bondholders (who hold security) are going to lose three quarters of their money, and unsecured trade creditors and landlords will get virtually nothing back. It can take a buyer years to rebuild that value, the company’s reputation.
- It can be difficult, if not impossible, for an administrator to trade the company on under his control. Suppliers and bankers cannot be forced to extend more credit, administrators won’t give any guarantees to lenders, customers can be difficult. If it’s not possible to trade on and administration is still the most appropriate option, the only option may be a prepack.
The thing that you need to go away is administration deals only with some of the problems of a business, it does not deal with them all, any buyer has a good many of things it has to get right for the ‘new business’ to succeed.