Covid-19 coronavirus: benefits of the administration procedure
07 April 2020
Administration is often depicted by the media as a procedure that is used when the company is on the brink of collapse. This is not always the case. Administration is a highly flexible and adaptable rescue tool that, in the right circumstances, can be used to stabilise, protect and if necessary restructure businesses.
The first purpose of any administration is to rescue the business and therefore it is a powerful mechanism to prevent creditors reaching for assets by providing management with a breathing space in which to determine how best to preserve value for creditors as a whole.
As a reminder of the key benefits of the administration procedure:
Continued day to day management of the business
The administration procedure allows management of the company to remain with its current officers provided they have the consent of the administrator. Whilst in some cases it might be appropriate to displace current management, in the current Covid-19 crisis, the administrator is likely to grant this consent given that the challenges the company is facing are not derived from concerns regarding management, but rather from the wholly exceptional nature of the Covid-19 crisis itself.
With many companies likely to face severe liquidity issues, the ability to keep administration costs down by leaving the administrator only to fulfil essential functions (with retainment of current management helping to achieve this) is likely to be a priority. Further, with the purpose of administration being to stabilise and rescue the company, the expertise and knowledge of the current management will help fulfil this purpose. It is important to reiterate that the administrator does not delegate powers to the directors, but rather consents to management retaining their existing powers so that they can continue with running the business.
Flexible environment in which payments to creditors can be made
The administration procedure provides a highly adaptable environment in which essential payments can be made, and in other instances paused, alleviating any liquidity issues that the company may be facing which in turn will help stabilise and protect the company.
The administrator retains the flexibility to make a payment to a creditor if it is determined that that would assist the purpose of the administration. Together the company, with the assistance of the administrator, can work with the company's creditors to determine which payments must be paid and which can be paused in order to protect the business in the interests of all stakeholders.
Ability for new money to get into the company
An administrator has the power to raise or borrow new money, and any debt or liability arising out of a contract which the administrator enters into attains a priority ranking over most of the company's existing liabilities. Concerns regarding restrictions in existing contracts, can be alleviated by the ability of the administrator to apply to the court for directions and there are mechanisms which can be used in order to navigate these challenges.
In situations where liabilities will need to be restructured, the highly flexible and adaptable corporate restructuring regimes of the company voluntary arrangement and the scheme of arrangement can be used in conjunction with the administration to achieve a restructuring.
There may also be the possibility of engaging a third tool 'the new restructuring plan procedure' which is part of the package of reforms that the Government will be considering when Parliament reconvenes.
There are other tools which can also be engaged in the administration process to achieve a restructuring transaction.
Government stabilisation measures
The administrator may be able to take advantage of the recent financial measures announced by the Government, such as the ability to furlough employees and the offer of grants for UK businesses. Such measures could provide additional support and stabilisation to companies, facilitated by the breathing space afforded to a company in administration.
However clarity regarding how Government measures interact with the administration regime, including whether the administration expenses regime can be applied to the Government measures, and what specific demands may be made of the administrator, are still needed.
Termination of contracts
While there are concerns that the moratorium which arises on administration does not prevent termination of contracts or the exercise of set-off rights, this will not be an issue for all companies and it will, in many cases, be possible to traverse this issue given the consequences of terminating contracts or exercising set off rights in the current circumstances. Other mechanisms can also be used to address these challenges.
The role of the administrator should also not be underestimated. Administrators are qualified, licensed and regulated practitioners with the skills and experience to protect and support businesses who are facing financial difficulties. Court intervention can therefore be kept to a minimum reducing costs of the process and the speed at which decisions can be taken, particularly significant when comparing to other jurisdictions whose corresponding regimes implicate significant amounts of court time.
The Legal Community
England's highly expert legal community have the initiative and experience to adapt England's deliberately flexible regime to meet the current challenges that companies are facing in light of the Covid-19 crisis.
New challenges such as immediate and urgent liquidity needs, stress spreading to all areas of the business and problems unlikely to be contained in the capital structure, mean that the legal community are able and willing to adapt the English regime to meet these issues once again demonstrating the world-leading flexibility which English corporate restructuring law offers.
The administration procedure will therefore play a vital role when it comes to stabilising, protecting and ultimately rescuing businesses.