I don’t know if you’ve been watching, but there has been an ongoing debate among insolvency practitioners, lawyers, the government and others about ‘light touch’ administrations?
What’s a ‘light touch’ administration?
It’s where the administrator devolves some or all of the power they have to manage the business of a company back to the directors.
You see 64 (1) of schedule B1 of the Insolvency Act 1986 allows this to happen because it says ‘a company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator’.
So the law enables the administrator to take a step back while the company still enjoys all the benefits of being in administration, such as holding the creditors back, with the directors still / back in control of the company.
What’s the purpose of a so called ‘light touch’ administration?
It’s to enable a company that’s under major financial difficulties to enjoy the benefits of administration, without suffering as much of the pain – for example the costs of the administrator and his team can be reduced.
What’s the problem with a light touch administration, surely it’s a good thing?
It is if you’re a director of an ailing company, but it might not be if you are a creditor of the company or the IP because:
- The directors who drove the company into its difficulties and who are unlikely to have as their focus the interests of the creditors – they’ll be wanting to drive it for their own or the shareholders’ benefit – are being empowered to drive the company through and out of administration with less oversight from the administrator than in a normal ‘full touch’ administration;
- The administrator is responsible if things go wrong. He himself has made the decision to devolve his powers, he didn’t have to, he has to live with the effects of that decision. From the decision onwards unless he takes back control, he’s wholly reliant on the directors, what they do and don’t do. He’s several steps away from the coalface, so often acting without complete information and relying on others, but still 100% responsible.
What are the views of the insolvency governing bodies?
Two months ago at the start of the lockdown, in an article on their website, the ICAEW said…
‘While in practice it can be common for administrators to involve directors in ongoing trading, there is a risk that in the present lockdown scenario, IPs may end up handing too much power back to directors. ICAEW would caution its insolvency practitioners against the widespread use of this process. While it is heralded as a saviour at the present time of lockdown, there is a significant potential risk to IPs from giving too much control back to directors.’
‘Responsibility for the conduct of any insolvency appointment falls to the officeholder’ … (ie the IP) ‘… and there is a significant potential risk to an IP if they commit to agreements that allow the directors to enter into transactions on their behalf. While financial limits could limit any exposure, there’s also the risk that some directors may well take advantage of the current constraints and it will be left to the IP to pick up the pieces.’
‘…we think that the ‘light touch’ administration poses a number of risks (financial and otherwise) for IPs, so don’t recommend that they go down that route.’
What’s my view?
I agree 100% with the ICAEW. Call me a control freak but 100% responsibility without the control afforded by a ‘full touch’ administration is not a good place to be.
Has my view been borne out?
Yes it has, read this. A £250 million claim is currently passing through the courts – yes, despite the administrators’ efforts to get it put off because of the lockdown – against one of my larger competitors. Let’s compare the £250m claim to the amount paid to the administrators in fees – £0.16 million.
And there’s at least one other similar claim being made – against one of the world’s biggest accountancy firms- that’s by the liquidators of Arthur Holgate and Son Limited, where £1.8m has been paid out in legal fees so far. So as you can see, the liquidators there also seem to have the bit in their teeth. The administrators were paid £0.3m in fees. The claim’s understood to be for over £10m. Note that these figures for the claims exclude the defending IPs’ time and legal fees in defending themselves. The ‘real’ cost of getting is wrong is huge, both financially and reputationally.
Conclusion
These two legal cases started off through the courts well before this round of debate on ‘light touch’ administrations. COVID19 and the introduction of the new moratorium procedure – which suffers from the same IP power / responsibility / risk mismatch – have brought the discussions into sharper focus. And the risk and potential value of claims are both probably higher now than at the time these administrations took place.
My question to you as a director is …
Would you personally go into any contract in your business with someone you didn’t know where that contract has a chance of seeing a claim being made against you personally for between 30 and 1,500 times of what you’re being paid, where you weren’t really in control of the outcome?
I guess you wouldn’t, and that’s why I say ‘just because you can doesn’t mean you should’, I won’t be doing any light touch administrations nor moratoria, thank you. If I get called in as administrator, I’m in control…
Paul Brindley
15 June 2020