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Light Touch Administration Protocol
He spoke about Light Touch Administration Protocol with another large group of insolvency practitioners from all over the country.
Light touch administrations - quick links
This is a new and complex area of insolvency law and this is a lengthy article. We’ve included some handy links below to take you to relevant sections, and have included some corresponding timings for the presentation recording.
- What is the light touch administration protocol?
- Why was it developed?
- What is different about light touch administration?
- When can you use a light touch administration?
- Statutory purpose
- Regulator's views
- The Courts' reaction to light touch administrations
- Will IPs use light touch administrations?
- Legal Advice on light touch administrations
Please don’t hesitate to get in touch if you are an insolvency practitioner and have any questions relating to issues raised here.
When I originally scheduled the theme, I was thinking about talking about the Light Touch Protocol in the context of traders, and its use in conventional circumstances. However, after the recent announcement of more stringent lockdown measures, I will be discussing it in its original context also.
It was designed as a summary debtor-in-possession procedure, with specific relevance to businesses that are fundamentally sound, but in crisis as a result of indefinite enforced closure. That has a renewed relevance.
The national lockdown, announced in March 2020, saw many enforced business closures. With zero or minimal trading, and staff on furlough, company survival remained possible in most cases.
Many otherwise healthy businesses faced financial difficulty as a result of restrictions imposed. These fundamentally sound businesses would be able to survive the pandemic as an ongoing concern.
There was consequently a lot of talk in the industry about the need for a debtor-in-possession procedure that allowed management to continue in control of their business. As ever, though, greater management involvement leads to greater stakeholder risk.
Who designed light touch administration protocol?
The existing administration procedure was used as the foundation for the new light touch administration protocol and it was designed and developed by some eminent practitioners, including Mark Phillips QC, The Insolvency Lawyers Association and the City of London Law Society.
Example of the light touch protocol in use
The protocol was used fairly early on in the Debenhams administration order. Unfortunately, Debenhams lost its concessions, and subsequently its buyer, as a result of the Arcadia administration and ultimately went into liquidation.
The key points that make a light touch administration different from a regular administration are as follows:
- The protocol is built upon a standard administration
- It envisages appointment by an administration order in open court (this is not essential, but certainly advisable)
- The Statutory Purpose is ‘to rescue the company as a going concern’
- The main element the protocol is built around is paragraph 64 of Schedule B1, which gives the administrator the power to consent to a director’s powers continuing throughout the administration. This is not a delegation, but a ‘stepping back’ by the administrators on certain issues.
- There needs to be a clear definition of the powers directors will be allowed to continue to exercise.
Malcolm goes into more detail on each of these points in the presentation, that you can watch here (the part relevant to the above paragraph is around 7 minutes in).
Light touch protocol template and requirements
You can download a template for the light touch protocol here. The requirements can be summarised as below:
- Rescue of the company as an objective
- There must be adequate working capital to pay administration expenses as they fall due
- There must be regular, specified reporting
- Some powers are restored to directors
- The business can trade ‘normally’ (within limits).
- The administrators retain rights to step in and take over
- An exit through CVA or a Part 26(A) scheme, or a less formal settlement
Key to the protocol is ‘company rescue’ as a statutory purpose and an exit through a CVA or Pt 26(A) scheme.
I don’t think the CVA or settlement element is absolutely necessary, as a light touch protocol could take place with the intention of realising assets to benefit the creditors.
In the Debenhams case, Debenhams was very likely to sell as a going concern (prior to the Arcadia administration), which would have achieved a better result for creditors.
In Davey v Money (2018) the director of the company challenged, through the courts, the way the administrators had conducted the administration. While this was before the protocol was drafted, it was described in court as a light touch administration. The courts had no issue with the administrators’ delegation to sub-contractors in this case.
The following options could be considered as alternatives to a light touch administration:
- The protocol can be quite heavily modified
- You could use a conventional administration
- A pre-administration moratorium
- Moratorium (Part A1 – CIGA’20)
- CVA (R3 COVID-19 template?)
Malcolm explores these options in more detail in his presentation. This section starts at around 13 minutes.
Here comes the big but. The Institute of Chartered Accountants in England and Wales’ (ICAEW) views on light touch administrations have not been altogether enthusiastic.
The protocol was published early in ‘Lockdown 1’ at a time when the government were promising new debtor in possession procedures in a new insolvency bill that had not yet been published. I suspect the ICAEW did not wish to be seen to be potentially undermining these new procedures.
Concerns published at the time centred around:
- The power directors may have
- Points the template may not cover (funding, H&S, and GDPR in particular)
- Assessing the Directors’ character (particularly in lockdown)
- IP’s risk (both legal and regulatory)
As a result, monitoring visits will look closely at the level of the Insolvency Practitioner’s ‘control and oversight’.
Malcolm examines ways in which these concerns can be dealt with in the presentation. He does this around 17 minutes in.
If you are dealing with one of these, it doesn’t necessarily rule out a light touch administration if it was otherwise appropriate, but they will certainly raise red flags with the regulators.
It would be advisable to take the following steps as protections if you were considering a light touch administration with one of the ‘three Ps’:
- Limit the directors to normal operational issues
- Appoint by administration order
- Pull the plug quickly if it goes wrong
- Keep the main stakeholders informed
We have seen in examples of Debenhams and Davey v Money that the courts seem happy with these procedures where they are properly run.
Courts do not like it when administrations are used as a tool to override legitimate interests of stakeholders (particularly with internal disputes).
Administration orders are certainly safer if there is a potential internal dispute.
We looked at alternatives to the protocol earlier in the article.
There seems to be a reluctance in the industry to use the new moratorium procedure, mainly due to the extremely narrow eligibility criteria and practitioner risk.
Non-trading administrations are tried and tested and relatively safe. You can either pre-pack or close and mothball.
A pre-appointment administration moratorium has occasionally been a useful way of holding everything together in the run up to another procedure such as a CVA. You could use a light touch protocol as a way to define interim powers for directors in these circumstances.
You could also use the protocol to limit directors’ powers pre-appointment in a CVA.
You can fast forward to 25 mins on the recording if you want to hear Malcolm’s further thoughts on this.
If you are an insolvency practitioner and would like to discuss any issues surrounding light touch administrations, please don’t hesitate to get in touch with Frettens’ Insolvency Guru, Malcolm Niekirk.
If you haven’t already, be sure to register for Malcolm’s newsletter to receive up-to-date information and insights in insolvency law, and invitations to his monthly ‘coffee break briefings’.