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Richard Ludlow

Partner - Sevenoaks & Ashford

27th April 2020

Light-touch administrations offer directors an alternative to saving their business during Covid-19

As the pandemic tightens and the UK Government shows no signs of lifting the lockdown anytime soon the impact on the economy is only increasing. As a result, there have been a number of changes made to the way the courts and the insolvency profession is set to deal with companies, the actions of directors and the failure of the business.

All this in an attempt, where possible, to enable the business to keep operating in this period and come out of the pandemic as a viable option.

As part of this process there is a move towards using “light touch administrations” which, in some respects, mirror the US “Chapter 11” procedure. Whilst this process is not a new one it does allow companies a further option to prevent liquidation during the economic crisis bought on by the Covid-19 pandemic.

The most noted current example of this “light touch” administration can be seen with the administration of Debenhams, with its 142 stores and in excess of £1bn of annual sales, last week entered into a “light touch administration”.

How does light-touch administration work?

In the course of a “normal – pre Covid-19 – administration” a director of the business could not, without the consent of the administrator, exercise their usual powers of day-to-day management. This consent was extremely rare, with the administrator making all decisions in respect of the day-to-day operations of the business.

With the current change of circumstances and in the world of COVID-19 there is a gradual move towards “light touch” administrations. In this scenario an administrator is far more likely to grant the director a broad consent. This will then allow them to continue to run the business as they would have done before and without the oversight of the administrator.

In order to formalise and regulate the issue of consents being given and what those consents mean; Mark Phillips QC, Stephen Robins and William Willson of South Square, have  (in consultation with the Insolvency Lawyers Association and the City of London Law Society) put together a “consent protocol agreement”. The purpose of the document is to particularise the consents and give clarity to the directors of the company in administration as to what they are entitled to do in order to continue running their business.

The benefits of light-touch administration

The adoption of a “light touch” administration, if utilised properly, clearly has fantastic potential – especially in these troubled times – to allow companies to appoint administrators but for the directors to run the business to try to ensure that it is still a viable option when the difficult period ends and the economy begins to return to some sort of normality.

The other considerable benefit of the “light touch” administration to the company and its directors is that whilst it gives the usual benefits – to the company in administration – meaning the companies’ creditors, suppliers and lenders will be stopped – under the moratorium – from commencing legal action against the company for the recovery of monies owed to them.

It should be remembered, however, that the purpose of the “light touch” administration remains as per the usual administration. The administrators will be taking steps throughout their appointment to rescue the business. This could ultimately mean that the company exits the administration and full control of the company is then handed back to its directors.

“It is important to make sure it is only being applied in the correct circumstances,” said Duncan Swift, president of R3, the trade body for insolvency practitioners. “If a company had impaired debt prior to the crisis, you would have to query if a light-touch administration was appropriate.

The use of this insolvency procedure may well become an increasingly popular option for companies as the Covid-19 lockdown continues.

Contact us

Our Restructuring and insolvency team have substantial experience in dealing with these issues. For advice on administration, the “light touch” option and all other insolvency procedures as well as how we can put you in touch with insolvency practitioners who can also assist and provide practical advice on the rescue of your company, please contact Richard Ludlow t. 01732 441695 e. richardludlow@rixandkay.co.uk

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