In 2003, the Enterprise Act (“the Act”) was enshrined into law. The main purpose of the Act was to promote fairness in mergers and market structures and to make certain anti-competitive behaviors an offence.
In this context, part of the Act amended the insolvency legislation that had existed since 1986 and effectively called time on the process known as administrative receivership. The rationale being when appointed as a receiver, the insolvency practitioner has a primary duty of care to the appointing secured creditor, and that, in turn, may not result in the best outcome for the general body of creditors.
In its place, the Act sought to simplify and streamline the process of appointing an insolvency practitioner as an “administrator” of an insolvent company. The legislation also introduced a legal moratorium on creditor actions before an administrator was appointed and provided the insolvency practitioner significant powers when taking office. Crown preference was also abolished.
The Act was hailed as introducing a “rescue culture.” Its intention was to help restore insolvent corporates to sound financial health and live to fight another day. It was now a statutory purpose that when appointed as an administrator, the insolvency practitioner must first seek to “rescue the company as a going concern” and explain to creditors why this had not been possible where alternative outcomes were being proposed.
In many respects, the legislation was successful in its purpose.
The idea that a high street bank could now appoint a receiver over one of its customers to sell its assets to the highest bidder, the prime objective being recovery of its indebtedness with scant regard to the implications of job losses or loss of goodwill value, is completely alien. Regardless of what the press may have you believe, it doesn’t happen.
But perhaps it’s also true that we have not quite embraced the “rescue culture” in the UK in the way the politicians of the day envisaged.
The legislators were able to facilitate corporate “rescue;” however, “culture” has to evolve.
The British spirit, undoubtedly, means seeking the advice and support of an insolvency practitioner is sometimes seen as a last resort. Consequently, by the time the challenged corporate considers options, it’s often too financially distressed to enable a true going concern rescue.
Over the last decade since the aftermath of the 2008 financial crisis, the administration process has come under a lot of scrutiny. It has largely evolved to be a transactional tool, facilitating the sale of the business and assets of a company to a third party. Without question, in a large proportion of these cases, the outcome for creditors will be better than the “old way,” but in the vast majority, the insolvent corporate will still cease to exist at the end of the process, and stakeholders will crystallize losses.
Covid-19 is a seismic economic event that has the potential to shift the rescue culture. There are two significant factors to support this.
First, its impact has touched everyone. No longer is financial stress (incorrectly) going to be an indication of boardroom incompetence or business failure. Suppliers and customers alike are facing the same challenges. What once was a basis for ridicule now becomes a cause of empathy.
Second, many of the corporates that are now facing the challenges of financial stress were, until a few weeks ago, profitable, viable businesses. Look beyond the current crisis, and they have robust business models and underlying going concern credentials.
Currently, we are using those extensive powers that an administrator has long held to support both a furniture retailer and a hotel operator through this unprecedented period. We are pursuing the first statutory objective as required by the legislators back in 2003, in each case, to rescue the company as a going concern. Lenders, suppliers and customers are all playing their part trying to restore the financial stability to what were once strong businesses.
It is true, to pursue such a strategy is not without risk, and to simply put the assets up for sale would be easier; but it would not be the right thing to do. And, so maybe the administration process, as envisaged, was culturally ahead of its time. Now, quite possibly, its time has come.
Byline by Matt Ingram, managing director, global restructuring advisory, Duff & Phelps