BusinessBusiness RecoveryValidity of administrations questioned

Validity of administrations questioned

The 2002 Enterprise Act has led to rising numbers of companies that enter into administration, while numbers of liquidations and administrative receiverships have fallen over the same period

But the rise in administrations is not necessarily welcome, according to the
latest research on the subject, nor is it always being used appropriately as an
insolvency tool.

A study commissioned by the Insolvency Service – prepared by Lancaster
University research fellows Alan Katz and Michael Mumford – has found that the
use of administrations as an insolvency tool has increased following its
introduction.

The Act was designed to encourage more corporate rescues while balancing out
the needs of creditors, however concerns have been raised in recent times that
administrations are being undertaken on cases that do not meet the Act’s
statutory requirements.

Of the cases looked into by the researchers, they found 57% had a ‘clear
justification’ for using the tool – amounting to 94% by asset value.

A further 14% were regarded under generally accepted interpretations of the
Act as justifiable, but administration was chosen in these cases solely to
provide a convenient method of sale of the business in circumstances that
appeared equally achievable if the company had entered liquidation.

The other 29% were considered ‘weak’ or ‘non-existent’ in terms of
justification for choosing administration as the insolvency tool.

While these cases did not represent a great deal of value, judged
individually each case could represent a level of assets where one ‘should be
concerned about potential abuse’, Mumford and Katz argue.

They suggest clarification and reform of the regulatory guidance to
insolvency practitioners on the circumstances where administration may properly
be used to deal with cases having no clearly demonstrable benefit over
liquidation.

Despite their concerns Mumford and Katz make other recommendations to change
the insolvency landscape in favour of more administrations. As administrations
have proved popular for their ease of use and potential to provide good returns
and save businesses, they recommend a reform of the law so that administrations
replace creditors’ voluntary liquidation.

CVLs are used when a company is liquidated by shareholders but there are not
enough assets to pay all the creditors.

Mumford and Katz argue that the rescue of a business is easier and quicker to
achieve under administration than a CVL, while realising distribution of assets
to secured and preferential creditors was an eligible reason to undertake an
administration.

Other cases looked into by the researchers found some hypothetical advantage
of a CVL, but the advantage was either very marginal or totally inconsequential
in context of the case.

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