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COVID-19: Light-Touch Administration ─ What Is It and How Does It Work?

April 24, 2020

A number of UK insolvency trade association bodies and professionals are advocating for the use of what is known as a light-touch administration for companies in financial distress as a result of the coronavirus (COVID-19) pandemic.

Light Touch Administration – What Is It?

One of the key differences between an administration in the United Kingdom and a Chapter 11 in the United States is that in an administration the directors immediately step aside and the administrators take full control of the company. In a light-touch administration the directors continue to exercise day-to-day management powers of the company with the consent of the administrator. Although all of the usual rules, requirements, and characteristics of the English law administration regime apply to a light-touch administration, the administration takes on the quality of a debtor-in-possession process, with the administrators acting as officers of the court exercising oversight of the administration.

A light-touch administration is not a separate or new insolvency procedure and the concept of a light-touch administration is not, in theory, a new one. However the process has not been used very often and it seems that this is about to change.

The idea behind the light-touch process is that this allows the directors to exercise key management powers to restructure the business under the oversight of the administrators and with the benefit of the statutory moratorium, with the ultimate aim that the company is rescued as a going concern, while incurring less expense in the process. The expenses are reduced because the administrators will only carry out essential functions rather than taking full executive and operational control of the company using their own staff to do so and making the relevant company employees redundant.

Directors Management Powers

On administration the directors are disenfranchised by law and lose their power to run the company unless the administrators formally approve an alternative arrangement. The administrators take control of the company and manages its business, affairs, and property in accordance with the statutory purpose of the administration.

In a light-touch administration the company directors retain specified management powers with the express consent of the administrator.

The ability for administrators to allow directors to exercise management powers in an administration is not new. This right, although rarely used, is enshrined in existing UK insolvency legislation in paragraph 64 of Schedule B1 to the Insolvency Act 1986. That provision contains a broad power for the administrator to consent to directors continuing to exercise management powers of the company under the supervision of the administrator. The consent given may be general or specific. Although technically the administrator does not need to obtain the approval of creditors before providing its consent, it seems unlikely to us that the proposed administrators would accept an appointment without the approval of creditors, and of course the holder of a qualifying floating charge can pre-empt the selection of administrators.

A key point to note is that paragraph 64 of Schedule B1 does not involve the administrator devolving powers back to the directors. Once appointed, an administrator is responsible for the conduct of the administration and owes a duty to all creditors. Administrators will carefully consider the powers which they may be willing to allow management to continue to exercise in a light-touch administration, and the terms and conditions under which those powers may be exercised, given that personal liability could arise for the administrators because an administrator is legally responsible for the conduct of the administration even if it delegates powers back to the directors.

Consent Protocol

The Insolvency Lawyers Association and City of London Law Society has published an illustrative Consent Protocol which acts as an example of a consent where administrators are willing to allow directors to exercise management powers of a company in administration.

The Consent Protocol is based on the administrator being satisfied that the company can be rescued as a going concern and, in particular, that the company has sufficient working capital to pay key post-administration costs and expenses (including, for example, rent, salaries, utilities and suppliers) on an ongoing basis.

The Consent Protocol identifies certain management powers that directors may be permitted to continue to exercise and specific conditions with which the directors must comply in order to exercise such powers. Some of the possible powers and associated conditions are as follows:

  • Powers: the sale and purchase of inventory, the performance of contracts in the ordinary course, the payment of employee salaries and for other services subject, in each case, to appropriate transaction limits.
  • Conditions: a general, overarching condition that the powers granted can only be exercised for the purpose of rescuing the company as a going concern. A condition that the directors report to the administrator on a regular basis. A specific reporting condition to cover any threatened or actual termination by contractual counterparties or anything that might suggest the rescue of the company is no longer a reasonable prospect.

The exact terms of a consent will vary from company to company and any consent will require an administrator to undertake a close examination of the state of the business in order to determine which powers are appropriate and any limits and conditions to be attached to those powers.

Coronavirus (COVID-19) Pandemic

UK insolvency trade association bodies and professionals have highlighted that light-touch administrations are appropriate as a rescue tool during the coronavirus (COVID-19) pandemic. It could be an option for those companies which find themselves in financial distress as a result of the disruption caused by the coronavirus pandemic and which, prior to the outbreak of the pandemic, were financially viable businesses with good management.

Conclusion

A light touch administration will not be suitable for all companies which find themselves in financial distress during COVID-19. It will be a possible rescue option for those companies which may otherwise cease trading as a result of the impact of the COVID-19 pandemic which have a real prospect of survival.

Even then, the use and success of a light-touch administration by UK companies will depend in large part on the extent of the powers which administrators are willing to allow existing management to continue to carry out and the conditions attached to the exercise of such powers. UK high street retailer Debenhams entered a light-touch administration on April 6, 2020, and everyone is watching the process with keen interest.

Whether the light touch administration gains widespread use as a tool for companies adversely affected by the COVID-19 pandemic will also be affected by the terms, and implementation timetable, of the proposed new UK insolvency reforms announced by the UK government in March 2020. These reforms include the announcement of a new moratorium for companies, which is expected to operate as a pre-insolvency debtor-in-possession rescue process. We reported on these proposed reforms in our LawFlash UK Government Announces Insolvency Law Reforms.

Coronavirus COVID-19 Task Force

For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Victoria Thompson
Georgia Quenby
James Mead