An idea that's bankrupt

Steve Hill sees no merit in the latest proposal to reform company rescues

There is a low-key consultation exercise going on which aims to improve the company rescue culture in the UK. Although the insolvency profession welcomes all attempts to reform the voluntary arrangement process, this latest proposal from the Department of Trade and Industry is misguided and should be thrown out.

Having backed away from a previous proposal that banks wishing to appoint a receiver should give a working week's notice of their intention to do so, the Government is now proposing that a court can replace a receiver with an administrator provided two criteria are met.

First, if the receiver has been appointed against the wishes of the company which has already petitioned for administration, and second, if the bank's security can be shown not to be at risk.

The proposal is misconceived. Banks invest a great deal in exploring every possible way to avoid a receivership. In two thirds of the cases where investigating accountants are appointed, no insolvency ensues.

However, at this, the most critical time in the company's existence, the Government proposes to introduce a dangerous new dynamic which will encourage the bank to appoint its receiver before the company has a chance to present its own administration petition. This will mean the number of insolvencies will increase and they will also be accelerated.

There seems to be a belief that if some receiverships were instead called administrations, that is in some way "better". This ignores the fact that administrations were introduced in 1986 solely to confer the benefits of receivership upon those companies which were technically unable to avail themselves of that option.

It is Coopers & Lybrand's experience that while a tiny minority of administrations might result in the survival of the company, nearly all of them are receiverships by any other name. The business is sold to new owners as a going concern, or it is broken up. Both procedures are a means to an end, and both generally achieve the same end by the same means. Which label is used is academic, save for two considerations.

First, an administrator is chosen by the company, while a receiver is chosen by the chargeholder. And second, an administrator has responsibilities to all creditors, whereas a receiver has responsibilities only to the chargeholder and the preferential creditors. These are fine differences which scarcely merit primary legislation. The result would at best be window dressing, with no discernible impact on the economic outcome in any cases.

Whether the floating charge can be shown to be at risk will sometimes involve the disputing parties obtaining all sorts of expert evidence and will involve costly litigation. Where possibly tens of millions of pounds are at stake, these issues will seldom be resolved amicably to avoid litigation.

A small number of directors might be less inclined to complain that a perfectly sound business has been avoidably thrown to the wolves, because they were able to pre-empt receivership by getting "their man" in as administrator. Similarly, a small number of banks might complain that the directors' man does not know what he is doing - whereas the man they wanted to appoint as receiver does and they have lost money as a result.

This is a key issue. Directors of troubled companies are (one hopes) occasional purchasers of insolvency services and might adopt a "Yellow Pages" approach to selection. Banks are not occasional purchasers. They will match practitioners to cases based on their track record, their industry specialisms, their integrity, their ability to deliver value for money and many other factors. Displacing the bank's receiver with the directors' administrator threatens to produce lower returns to creditors and fewer rescues. Why should banks want to provide banking facilities to administrators they have not chosen and do not want? Are they to be compelled to lend money to insolvent companies against their will?

Once less than optimum results have ensued a few times under this scenario, we will see banks move heaven and earth to ensure that their receiver is in office before the company's administration petition is before the court. Different parties, fed by misinformation and rumours as to what the "other side" may be up to, will be sending motorcycle messengers all around town in a desperate bid to get their retaliation in first. This is not how businesses are rescued.

The 1986 Insolvency Act tried to make receivers more accountable to trade creditors and indeed did so. However, it rightly recognised at the time that to go further would get in the way of saving businesses and jobs.

Ultimately, insolvency means some people lose money and some people (especially incompetent managers) lose their jobs. Complaints and criticisms are bound to ensue in some cases. These new proposals will do nothing to change that, although they might result in a slightly different body of people doing the complaining. The idea has no merit, and deserves to be buried quietly and quickly.

The author is technical partner at the business recovery and insolvency practice atCoopers & Lybrand.