COVID-19 has instigated a discussion around so-called "light-touch" administrations and their usefulness.
But what are these, and when can — and should — they be used?
In a traditional administration the insolvency practitioner takes control of the business, assuming full management responsibilities. In contrast, if a light-touch administration is used, the insolvency practitioner (IP) allows certain management powers to remain with the business's existing management team.
Why would an IP allow that if the business is insolvent?
There are a variety of reasons; the main one being to leverage the existing management team's knowledge and experience both of running the business, and the sector in which it operates.
Naturally an IP will only consider leaving or delegating certain management powers with the existing team if he or she has complete confidence in their ability to manage the business. In most insolvencies the perceived failings of the management team are seen as the primary reason why the business finds itself in an insolvency situation. However, as COVID-19 has demonstrated, a business can become insolvent despite having a competent and experienced management team at the helm.
In this scenario, it may make sense to leave that team in place rather than the IP assuming full control.
An IP will need to consider very carefully whether a light-touch insolvency is approriate as ultimately responsibility for the administration rests with them. If it is decided to proceed with a light-touch administration, a prudent administrator will wish to put in place a consent protocol clearly setting out who is permitted to do what and the powers each party will have.
The IP will also wish to set out procedures to ensure they still have complete oversight of the administration and there are no nasty surprises in terms of what the management team has been doing. Equally, strong lines of communication are essential.
COVID-19 is a unique situation and commentators have considered whether we will see an uptake in the use of light-touch administrations. R3, the Association of Business Recovery Professionals is not however convinced that IPs will rush to use it, citing the relatively few situations where a pre-pack or trade administration will not serve the insolvent business better.
R3 also notes that circumstances where a business enters insolvency due to factors entirely outwith the management team's control are rare.
As with all things COVID-19 related, watch this space!
“It is important to make sure it is only being applied in the correct circumstances,” said Duncan Swift, president of R3, the trade body for insolvency practitioners. “If a company had impaired debt prior to the crisis, you would have to query if a light-touch administration was appropriate.”