“Light Touch” Administrations

The restructuring and recovery profession is seeking to quickly adapt to the economic strain and disruption presented by the COVID-19 pandemic. Whilst new restructuring procedures may soon be introduced to provide distressed companies with protection, the industry has been encouraged to innovate with the tools it already has. One possible option that is developing is the concept of “light touch” administrations. The extent of the “light touch” and the suitability of the option will depend on each scenario.

The Insolvency Lawyers Association and City of London Law Society have published a template form of consent for use where administrators wish to allow directors to exercise management powers while the company is in administration.

Directors cannot exercise management powers without the administrators’ consent (paragraph 64, Schedule B1, Insolvency Act 1986). Consent is not ordinarily given. However, where a company’s difficulties stem from the COVID-19 trading restrictions and lockdown, there may be circumstances where consent may be appropriate to preserve an otherwise successful business.

Consent should only be given where administrators are satisfied that the company can be rescued as a going concern and has sufficient working capital to settle post-administration costs and expenses such as rent, employee salaries, utilities and suppliers on an ongoing basis.

The administrators will remain responsible for the administration and the risks that all administrators are familiar with. It remains to be seen whether this option gathers momentum outside of a scenario where (i) the administrators already have an extensive understanding of the business and its management team; and (ii) there is significant funding committed to any trading during administration and/or any hibernation process. In all cases, it would seem prudent that administrators should also seek suitable indemnities to protect themselves.

Only time will tell but it may be viewed as an expensive (and for the administrators, risky) way of obtaining a short term moratorium to protect any continued trading and/or hibernation process. However, it may be the only option available.