This article was first published in the Spring 2025 edition of R3's Recovery magazine.
The UK’s administration process is not fit for purpose, and it is only the continued innovation of insolvency practitioners that has kept it alive in a diluted form, far removed from the purpose for which it was originally intended. It is time to reform the process, to allow it to be used as a gateway to rescue and reconstruction, not as a final insolvency destination. Unfortunately, governments tend to take notice of the insolvency regime only after it has buckled under the close scrutiny of a recession, with an accompanying clamour to legislate in a way that solves yesterday’s problem. A more forward-looking approach to legislative reform would be of huge benefit, taking a step back from what we have, and towards what we want from our insolvency processes.
Statutory definition
When approaching any proposed reform of the administration regime, it is worth noting that it was first introduced in the Insolvency Act 1985, following the recommendation of the Cork Committee (1977-1982), to cover a gap in the corporate rescue regime, namely those companies that did not have the benefit of a floating charge holder who could appoint a receiver over the whole, or substantially the whole, of the business and assets of a borrower. The administrative receivership process, given statutory definition by the 1985 Act and subsequently consolidated in the Insolvency Act 1986, was a creature very much of its own time, where the vast majority of corporate borrowing was taken from the major clearing banks. It was in the lender’s interest to sell the business and assets as a going concern, funding the administrative receiver to stabilise and trade the business while looking for new owners who could clear the bank’s debt and, consequently, rescue the business.
This type of rescue had the advantage that the lender was often the key stakeholder as corporate borrowing tended not to be so diffuse, with less bespoke asset-based finance (and thus available assets) meaning the lender providing funding was clear going into the process that they could control the costs and expenses of the business and the accompanying process. This ensured that administrative receiverships that saw the business being traded were a common occurrence.
The lending landscape
The Enterprise Act 2002 introduced a series of overtly political reforms, intentionally giving the management/owners a ‘second chance’ by opening up the administration process through a cheaper out-of-court process, abolishing administrative receivership and making company rescue the primary objective of administration. The bank’s loss of control was offset by the abolition of Crown preference, but the unintended consequence was to cut the link between the lender and the funding of the rescue process, which ultimately caused the death of the trading administration. What was particularly short sighted at this time was the rejection of calls to bring in a form of super-priority funding, on the entirely unfounded optimism that it would be for the existing lender (as it was in administrative receivership) to decide whether there was merit in funding a trading period.
The rise in debtor-led administration has been accompanied by an ever-increasing degree of securitisation of company assets, increasing the number of key stakeholders in any prospective administration with the consequence of additional complexity in finding a solution. The global financial crisis of 2008–2009 also led to the retrenchment of the clearing banks which at the same time became less inclined to lead the restructuring processes. In addition, a subsequent deluge in alternative capital provision has caused huge shifts in the dynamics of any business rescue process. The lending landscape of over 40 years ago, which produced administration as an alternative to administrative receivership, is now radically different.
Along with lenders having less inclination to fund and use administration to restructure the borrower’s business, the judiciary’s strict interpretation of the cost and expense rules in administration causes a significant issue for the board of the debtor company and any prospective administrator. As a result, the use of administration as a breathing space to work out how the business would best be rescued and restructured, with a consequent plan to be proposed to creditors and then implemented if approved, is all but dead. Currently, it would be a foolhardy practitioner that enters the administration process without a clear exit plan and, of course, this has meant that the pre-pack has developed as a solution that dominates thinking and distorts the public perception of the process. It is time for a rethink to return administration to its original purpose.
Towards reform
At its core, any legislative reform should introduce a process that allows for a breathing space (for example, a moratorium). Management/owners could retain principal responsibility to manage the affairs of the business in the interests of the creditors as a whole but rely on professional oversight and assistance to either trade the business to return it to a going concern basis or draw up a plan of rescue or reconstruction that will be put to creditors (secured and unsecured) for approval, with a potential for a court approved cram down.
A reluctance of the management/owners to enter the current administration process is often due to the consequence of loss of control to the administrators. To such stakeholders the appointment of an administrator, timed in accordance with their wishes and direction, as seen in a prepack, makes sense. It is true to say that a ‘light touch administration’ is available in the current regime but giving such a process a statutory effect would protect the directors from what should be strengthened wrongful trading legalisation and thus provide an additional incentive to use the process more readily, and distinctly earlier, in the distress curve.
As a balance to debtor-in-possession control, the directors should not be excused from any finding of misfeasance during the process if they fail to act in accordance with the modified duty to promote the success of the company (and thus creditors). Even where the company is rescued, the office-holder should be required to look at the pre-process conduct of the directors and those within the current ownership structure, both to report to the Insolvency Service and as a key part of making recommendations to the creditors voting on any plan involving the exiting management/ownership.
Lessons should be learned from previous attempts to decrease office-holder control to an alternative monitoring role (for example, a small company CVA moratorium and new-style moratorium). The new process of oversight described above should not be overly complex and should avoid imposing an unnecessary burden on the office-holder, but it should be policed by an immediate ability to remove/replace directors and report any abuse of the process.
Another crucial issue that needs to be addressed is the strict cost and expense rule associated with any trading administration process. Some ability to disclaim contracts should be considered in addition to a change in the priorities of the expense rule because the current rules mean that office-holders are disincentivised from taking an appointment where there is a commercial risk of trading such that they will not be paid for their services. A process that allows super-priority funding (perhaps as part of the agreed plan) is a further issue that needs to be considered afresh.
Reputational difficulties
One final consideration is the name of any reformed process. While legislative change would take the shape of a reformed administration process, it is quite probable that, in the minds of the public and stakeholders, administration is an insolvency destination process, and this perception has taken such a deep root that simply reforming the administration process will not be sufficient to change attitudes and behaviours.
The current risks of trading with the accompanying cost and expense, alongside the desertion of investors/funders, suppliers and customers/clients, create a death spiral for a business in administration and the alternative, a pre-pack solution, suffers from public reputational difficulties despite the profession’s promotion of the positives such as job retention and creditor returns.
As a result, there could well be a case to be made that, rather than simply giving statutory effect to a new style light-touch administration process, we would need to a find a new name for this forward-looking corporate rescue process. Calls for the originator of the idea to be given some credit, perhaps by giving their name to the new process, would not be resisted.
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