Administration – the pros and cons

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: 

Pros

  • 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.

Cons

  • 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.

BERR’s consultation on pre-packs – a wasted opportunity

At the end of March, the Insolvency Service issued its report following its consultancy over the transparency of pre-packs in administrations.  The headlines in the non-insolvency trade press suggests there will be major changes ahead, but I very much doubt it – those outside of the insolvency profession will be sorely disappointed, maybe not just yet, but give it 12 months or so and they will be.  Berr have effectively soft soaped those in industry, playing to their prejudices while recognising there’s no major evidence to support industry’s views that the pre-pack proedure is being widely misused.  Ultimately the report will do nothing to ease the concerns of those in industry over the alleged abuse of pre-packs or to improve the standing of those involved in the insolvency profession.  The divide between industry and the insolvency profession will remain as wide as it is now.

Here’s an article I wrote for Road Transport Today in response to the report.

‘Much of the commentary on pre-packs seems to be based on the perception that it’s the insolvency practitioners’ responsibility to ensure there is a level playing field across a given sector.  But they do not exist for this reason.  And I’m not even sure that this is the role of the government through BERR.

Like any professional adviser, insolvency practitioners are charged with doing the right thing, in the right way and at the right time so as to achieve the best result under the circumstances, where ‘right’ means ‘within the law’.  Like any other adviser they cannot allow someone else’s wider moral viewpoint to come into play.  They have to deal with the facts in front of them at that particular time.  Where the sale is to the same management, there is obviously a huge self interest element for them. It’s little different from business owners following their accountant’s advice on how to mitigate tax, except the insolvency practitioner has to explain his decisions in a detailed report to the creditors because his duties lie with them.

This announcement will do nothing to tighten pre-packs, because (i) they are accepted by the government, if not by competitors, as a proper tool for dealing with insolvency situations; and (ii) there is no evidence that pre-packs are being abused as the law stands (strange that the Insolvency Service report to effect, made the same day, got buried!).

This announcement therefore merely temporarily pours oil over the water of onlookers’ views of insolvency practitioners and pre-packs.  In reality a three day waiting period will have little or no practical impact.  I cannot see many creditors injuncting the Administrator to prevent a sale.  And how many fresh interested parties do we expect to be able to come properly to the table, make a better offer, accept similar terms, and provide evidence of unconditional funding in such a short space of time?

With the government estimating that one in four administrations is a pre-pack, and several factors in the economy often making them the only solution at the moment, the battle lines will remain drawn firmly between those for and against the process.  This debate will rumble on, and on, and on……’

BERR's consultation on pre-packs – a wasted opportunity

At the end of March, the Insolvency Service issued its report following its consultancy over the transparency of pre-packs in administrations.  The headlines in the non-insolvency trade press suggests there will be major changes ahead, but I very much doubt it – those outside of the insolvency profession will be sorely disappointed, maybe not just yet, but give it 12 months or so and they will be.  Berr have effectively soft soaped those in industry, playing to their prejudices while recognising there’s no major evidence to support industry’s views that the pre-pack proedure is being widely misused.  Ultimately the report will do nothing to ease the concerns of those in industry over the alleged abuse of pre-packs or to improve the standing of those involved in the insolvency profession.  The divide between industry and the insolvency profession will remain as wide as it is now.

Here’s an article I wrote for Road Transport Today in response to the report.

‘Much of the commentary on pre-packs seems to be based on the perception that it’s the insolvency practitioners’ responsibility to ensure there is a level playing field across a given sector.  But they do not exist for this reason.  And I’m not even sure that this is the role of the government through BERR.

Like any professional adviser, insolvency practitioners are charged with doing the right thing, in the right way and at the right time so as to achieve the best result under the circumstances, where ‘right’ means ‘within the law’.  Like any other adviser they cannot allow someone else’s wider moral viewpoint to come into play.  They have to deal with the facts in front of them at that particular time.  Where the sale is to the same management, there is obviously a huge self interest element for them. It’s little different from business owners following their accountant’s advice on how to mitigate tax, except the insolvency practitioner has to explain his decisions in a detailed report to the creditors because his duties lie with them.

This announcement will do nothing to tighten pre-packs, because (i) they are accepted by the government, if not by competitors, as a proper tool for dealing with insolvency situations; and (ii) there is no evidence that pre-packs are being abused as the law stands (strange that the Insolvency Service report to effect, made the same day, got buried!).

This announcement therefore merely temporarily pours oil over the water of onlookers’ views of insolvency practitioners and pre-packs.  In reality a three day waiting period will have little or no practical impact.  I cannot see many creditors injuncting the Administrator to prevent a sale.  And how many fresh interested parties do we expect to be able to come properly to the table, make a better offer, accept similar terms, and provide evidence of unconditional funding in such a short space of time?

With the government estimating that one in four administrations is a pre-pack, and several factors in the economy often making them the only solution at the moment, the battle lines will remain drawn firmly between those for and against the process.  This debate will rumble on, and on, and on……’