IP Briefing: Rescue Administration – a cure for businesses’ coronavirus ills?

Throughout Scotland, businesses across all sectors are facing an unprecedented challenge. The spread of COVID-19 and the subsequent lockdown have seen many otherwise-viable businesses forced into a prolonged period of restricted or no income. Unlike many cases prior to now, these businesses are not imperilled because of some fundamental flaw, or the conduct of their directors. Given time and space to recover, many could return to profit once the world begins to emerge from lockdown. Is it possible, therefore, for insolvency practitioners and advisors to support these businesses through this period?

On one analysis, the tools already exist which would allow insolvency practitioners to do just that. In the recent past, administration has often been seen as a precursor either to insolvent liquidation or a pre-packaged sale of assets. However, by re-emphasising the first statutory purpose of administration, it has been suggested that the powers granted to an administrator upon appointment would allow them to create a light-touch regime which would grant a distressed business the benefits of administration – such as the moratorium, and access to restructuring mechanisms – without requiring the administrator to displace the existing management team and take over running the business. In circumstances where the business has clearly been overborne by circumstances, rather than by problems within the management, there arguably may be less risk associated with retaining existing managerial staff. Further, the more of the day-to-day management is handled by the existing directors, the less involved the administrator has to be – helping to keep administrator costs down, and ensuring these do not outweigh the benefits of administration for smaller businesses.

In order to help facilitate this, the City of London Law Society has produced a draft style document, whereby a company’s administrators consent to the continued exercise of (some of) the directors’ powers. This Consent Protocol allows the directors to continue to acquire and dispose of stock-in-trade, as well as to perform contractual obligations and to pay salaries, all subject to upper limits. These powers are accompanied by express limitations, such as the ability to negotiate rents or to borrow money; these powers are retained by the administrator.

Of course, while this document is aimed at addressing some of the risks which are inherent in an administrator relinquishing day-to-day control of a business, it cannot address all of them. Most notably, the Consent Protocol was clearly drafted with one eye on the requirement to keep administrator costs down, in order to ensure this remains a viable option for smaller and medium-sized businesses. However, even in a light-touch administration the administrator takes on a significant level of risk. Indeed, this is only increased by relinquishing day-to-day supervision and allowing directors to operate the business. As such, many insolvency practitioners would expect to see this risk reflected in their pricing. There is a clear tension between the need to limit administrator costs and the drive to ensure administrators are properly compensated for the additional risk they are expected to shoulder.

With all this in mind, it remains to be seen whether rescue administration will indeed prove to be the answer to many businesses’ current ills. From a legal viewpoint, it appears that the existing powers afforded to an administrator, along with the benefits of the administration regime, could all be quite properly applied in a novel way with the aim of rescuing a business which retains sound fundamentals. However, practical difficulties – such as the proper apportionment of risk and reward may mean that insolvency practitioners are wary of taking this on-when it is very difficult to judge what businesses can continue as going concerns. It remains to be seen whether these issues can be properly addressed. However, the economic impact of COVID-19 is likely to be with us for some time – and there will no doubt be other schemes to implement if this does not attract adherents.