UK: PROTECTING LAME DUCKS. - The DTI proposes to bring in a moratorium on receivership.

Last Updated: 31 Aug 2010

The DTI proposes to bring in a moratorium on receivership.

Insolvencies have fallen off in the last three years or so. Receiverships and liquidations are significantly down. On the other hand, administrations are holding fairly steady. Why? The simple answer is that, if a company is unable to pay its debts, its directors would (marginally) prefer to put it into the hands of an administrator. It could also mean that the business is more likely to be kept intact. But some experts feel strongly that administration has its own drawbacks.

Van manufacturer Leyland Daf went into administration in February 1993 when its Dutch owner hit the rocks. The Government resisted calls to bail the company out. Instead insolvency experts from Arthur Andersen put together a package which left the local management in charge. Now known as LDV, the business employs 500 more people than before the crisis, and it has been consistently profitable since that time.

The problem is that, while administration has been successful in preserving larger businesses, it is less helpful to smaller and medium-sized ones.

Steve Hill, an insolvency partner at Coopers & Lybrand, explains: 'Because it's a court-driven process it's expensive. You've got to have six figures in realisable assets to make sense of an administration.' That's why the Department of Trade and Industry is floating proposals for a change in the law to encourage a less formal type of procedure - the corporate voluntary arrangement (CVA), under which companies can negotiate a payback plan with their creditors.' The snag, at present, is that there's nothing to prevent a hasty creditor jumping the gun on a CVA, and rushing the company into receivership.

The DTI proposes to bring in a 30-day moratorium on receivership while a CVA is being thrashed out. It has also suggested a five-day notice period before a receiver can be appointed. For the banks - typically the most powerful se-cured creditors who have been wont to insist on the appointment of a receiver - this would be a step too far. As Mike Young, assistant director at the British Bankers' Association, puts it: 'We believe it would be a window for fraud.' The banks fear that five days would be more than enough for an unscrupulous director to strip the company of significant assets. They have agreed instead to draw up a voluntary code of conduct (for both banks and customers) to ensure that the plug is not pulled prematurely on a struggling business.

Gordon Stewart, president of the Society of Practitioners of Insolvency, says that: 'Administration has done a good job in the context of what it was asked to do. It is a useful weapon in the armoury of those who are trying to save companies and businesses.' The SPI broadly supports proposals for a moratorium when a CVA is being set up, but would be unhappy to see the balance shifted further away from the creditor before the issue has been thoroughly debated. It also sees practical difficulties in the Government's proposals.

But for Professor Prem Sikka, of Essex University, the insolvency professionals are part of the problem: 'The present procedure favours the receivers and administrators - they always get their fees first.' Sikka quotes the example of a woman who lost two pubs and her flat as a result of a £4,500 debt for wine supplies, while the receiver charged a £120,000 fee for selling her assets at below-market rates. In a paper for the Fabian Society, written with Labour MP Austin Mitchell, Sikka called for an independent insolvency commission to oversee practitioners, and hear the views of stakeholders including employees.

Meanwhile, administration remains a drastic solution. Even an insolvency professional like Steve Hill believes it is better to take action before things get that far: 'Managers must ask for help when they need it, not six months later.'.

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