Insolvency Expert Comments On 'Rescue Culture'

A recent survey of members of insolvency trade body, R3, found that on average, 28% of potential trading administrations are now pre-packed or liquidated because of the expenses regime. This demonstrates that the legislation setting out what is an ‘administration expense’ needs urgent change to help save viable businesses.

The UK’s business rescue culture is being hampered by the Government’s refusal to implement legislation to clarify what is an ‘expense of an administration’. This will help rescue thousands of businesses that enter administration, says R3, the insolvency trade body.

Until recently, an administrator understood that if he was trading a business and trying to rescue it he had to pay certain trading costs (administration expenses) as a priority but recent court rulings have thrown uncertainty on this principle. The interpretation of what is considered an administration expense has widened considerably, particularly for rent and pensions obligations, to the extent that rescuing a business through a trading administration is too costly.

Andrew Walker, chair of R3 in Yorkshire and partner at Irwin Mitchell, comments: “Continued uncertainty has had an unhelpful impact on the UK’s rescue culture, with far reaching, adverse consequences for the UK economy. If Insolvency Practitioners are not sure about how much it is going to cost to trade a business they may have to make the decision to close it, meaning creditors lose out and jobs are put at risk. The Government is aware of the problem but is being slow to act.

“It has huge consequences on the ability to rescue businesses, the lending culture, and returns to unsecured creditors. Paying out an undetermined range of costs as a priority makes deciding to risk trading a business significantly more expensive and, in many cases, impossible.

“A decision on ‘administration expenses’ should not be left up to judicial discretion on a case by case basis, but needs to be laid out clearly in legislation. R3 wants to see a solution as to which items of expenditure should be payable as an expense of administration and which should not to ensure the costs of administration are known, therefore giving Practitioners the ability to save more businesses.”