Coronavirus (COVID-19)—launch of protocol agreement for administrators

Coronavirus (COVID-19)—launch of protocol agreement for administrators

The coronavirus (COVID-19) crisis has had a significant impact on businesses around the world, putting many at real risk of insolvency. The administration regime is one of the insolvency tools available to assist otherwise viable businesses survive this time. Mark Phillips QC, Stephen Robins and William Wilson of South Square have drafted a consent protocol agreement (in consultation with the ILA and the CLLS) to allow the directors of a company in administration to continue running the day to day business of the company within the thresholds set out in the agreement. The consent protocol is now available in LexisPSL and the authors discuss its use in this News Analysis.

As a result of the COVID-19 crisis, the UK business community is experiencing unprecedented financial distress and liquidity issues. The nationwide ‘lockdown’ has deprived companies of cash-flow that would ordinarily be used to service day-to-day debts and periodic liabilities (eg rent and business rates). It is estimated that the lockdown costs the UK economy £2.4bn a day.

The Insolvency Act 1986 (IA 1986) introduced administration, part of a ‘rescue culture’ intended to give companies a breathing space in which they could resolve solvency problems. Administration was intended to enable an administrator to ‘carry on the profitable parts of the business of the company with a view either to procuring its recovery or its disposal as a going concern’ and to avoid companies being ‘forced into liquidation and potentially viable businesses capable of being rescued [being] closed down’ (see Lord Browne-Wilkinson in Powdrill v Watson [1995] 2 AC 394, 441). After the Enterprise Act 2002 introduced out-of-court filings and a distribution mechanism, administration became most commonly used for pre-packs, asset sales and distributions to creditors. However the underlying purpose was never lost, only forgotten. The primary purpose of administration remains ‘rescuing the company as a going concern’ and achieving a better result for creditors as a whole than would be likely on a winding up is only available if rescuing the company is ‘not reasonably practicable’ or a sale will achieve a better result for creditors as a whole than a rescue (IA 1986, Sch B1, para 3).

The UK administration regime is an essential tool to assist in the rescue of otherwise viable enterprises and is sufficiently flexible to allow a bespoke administration process that is specifically designed to promote the rescue of viable businesses whilst simultaneously addressing the volume and scale of the difficulties resulting from the COVID-19 crisis. In consultation with numerous solicitors (including the Insolvency Lawyers Association and the City of London Law Society) and insolvency practitioners, the consent protocol has been produced. It is an integral part of an administration regime intended to create long-term solutions to what is hopefully a short-term problem, saving businesses and livelihoods across the UK.

IA 1986, Sch B1, para 64 provides the administrator with a broad power to give consent (whether general or specific) to the continuing management of the company by the existing directors under the administrator’s supervision, without seeking creditor approval. Where the primary objective of an administration is to rescue the company as a going concern, the consent protocol provides a framework to allow the directors to manage the day-to-day business of the company under the administrator’s supervision. The consent protocol can be applied to companies of all sizes, and its terms should be adapted to fit the particular circumstances of the case.

The main features of the consent protocol are—(a) the identification of broad management powers which can continue to be exercised by the directors (which does not involve the delegation of any of the administrator’s powers to the directors), and (b) the identification of specific conditions with which the directors must comply in order to exercise those powers.

The core requirement is the directors’ obligation to report periodically to the administrator and to inform the administrator of any information that could suggest to a reasonable person that there is no longer any reasonable prospect of rescuing the company as a going concern.

This ‘Rescue Administration’ should facilitate the stabilisation and preservation of the company and its business until the COVID-19 crisis has ended. We anticipate that the insolvency practitioner will then be able to compromise the company’s accumulated debts by either a consensual arrangement, a company voluntary arrangement (CVA) or a scheme of arrangement either by agreement, CVA or possibly under the new moratorium the government has promised to introduce. The consent protocol should be an additional tool that helps insolvency practitioners secure a company’s long-term viability. It is hoped that it will help practitioners use administration for its intended purpose and help save livelihoods.

The consent protocol can be found here: 

Consent protocol (administration)

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.