Insolvency Partner Calls For Clarification

R3, the trade body that represents more than 300 insolvency practitioners in Yorkshire, has warned that the UK’s business rescue culture is being hampered by the Government’s refusal to implement legislation to clarify exactly what is an expense of an administration, which will help rescue thousands of businesses that enter administration,.

When a company goes into administration, the Insolvency Practitioner (IP) appointed has to rapidly determine whether it is possible to keep the business trading whilst he tries to find a buyer to preserve the business as a going concern in order to protect jobs and secure the best value for the business’s assets.  What is critical to supporting a rescue through a “going concern” sale is the ability to pay for the trading liabilities that the administrator incurs once he is appointed, such as wages, rent, rates and new supplies.

Until recently, an administrator understood that he was liable for the trading costs (administration expenses) he incurred on a day by day basis but recent case law has thrown considerable uncertainty on this principle. The extent of what is considered as an administration expense has widened considerably, in particular for rent and pensions obligations, to the point that rescuing a business through a trading administration is considered too costly.

Instead the IP is forced to close down the business immediately, thereby losing jobs and reducing the value of the business assets, to the detriment of creditors and employees.  Legislation which clearly sets out what is an administration expense is urgently required to remove this uncertainty, ease administration planning and promote business rescue.

Andrew Walker, chair of R3 in Yorkshire and partner at Irwin Mitchell said: “These court rulings and the continued uncertainty has had an unhelpful impact on the UK’s rescue culture, with far reaching, adverse consequences for the UK economy. Tinkering with the existing priority system makes it harder to bail out stricken businesses and means other creditors lose out. The Government is aware of the problem but seems to be unprepared to act.

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

“Before recent case law broadened the number of claims counting as administration expenses, secured creditors such as banks could with more certainty recover value towards their lending from their floating charge security in the event of insolvency. The extension of the scope of what is an administration expense is bound to make lenders more sceptical about the value of their security and hence their willingness to lend to certain businesses.”

He continues: “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.”