As many leisure and hospitality providers as well as non-essential retailers were ordered to close their doors to customers as the country entered lockdown to combat the spread of the Covid-19 coronavirus, many business owners were left wondering how they would be able to survive while these restrictions were in place.
However, government support measures including the staff furlough scheme, coupled with emergency legislation temporarily banning the forfeiture of commercial leases, has allowed these retailers, and other companies ill-suited to transfer their operations to a ‘work-from-home’ model, the ability to temporarily pause their business alleviating immediate pressure.
However, once this government-funded life support is tapered down, or turned off entirely, many will be left with huge gaps in their cash flow, mounting costs, and concerns as to the long-term effects this enforced period of closure will have on their business going forwards.
One solution open to those companies with a strong potential for long-term viability is a type of formal administration known as ‘light touch administration’.
Retail giant Debenhams has already entered into such an agreement in an effort to protect its 142 stores from creditors. While the department store chain may be the first high-street businesses to go down this route, they are unlikely to be the last, with many more retailers reportedly lined up to follow suit.
The mechanism is particularly suited to larger companies with a high street or physical presence who have seen their trade decimated due to enforced closure of their retail or trading space. Although stores have been made to shut temporarily, if there is still the prospect of a viable business once we return to a sense of normality, then light touch administration could be an attractive solution.
How does the light touch administration process work?
Like other types of administration, the process is designed to give a company protection from its creditors while the affairs of the company are dealt with and a route forward is planned.
Once a company enters administration, whether this a light touch administration process or not, a moratorium is issued which prevents legal action from outstanding creditors, giving the company time and space and the ability to formulate a viable plan for the future direction of the business.
This could involve the business continuing to trade following a process of restructuring or refinancing, entry into an alternative formal business rescue process such as a Company Voluntary Arrangement (CVA), the sale of the company to either a connected or unconnected party, or in some cases, the closure of the company via liquidation.
In many respects, light touch administration is very similar to other more established administration processes, however, the key difference pertains to the management powers which are in effect while the company is in administration.
Unlike other forms of administration, with the light touch process, directors remain in control of the day to day running of the business rather than relinquishing this control to the appointed administrators. This is a hugely attractive proposition to business owners who believe in the long-term viability of their business and are keen to trade through the current situation without the threat of creditors commencing legal action.
While the light touch process allows the current owners to retain control of the day-to-day activities of the business, the appointed administrators of the company will still have responsibility for the overall management of the company’s affairs while it is in administration. This may mean that limits are placed upon access to the company’s funds. The extent of these limits will be determined on a case-by-case basis with the reasons behind the company’s current financial problems, and the overall health of the business both before and during Covid-19, being a significant factor.
What does light touch administration mean for staff?
As with all types of administration, a company will only be able to enter into the process if it can serve one of the three statutory purposes as defined in The Insolvency Act 1986:
1. Rescuing the company as a going concern
2. Achieving a better result for creditors than would be possible if the company were wound up without first being in administration
3. Realising property to make a distribution to secured or preferential creditors
For many companies entering administration, the ultimate aim is to save the company, and therefore jobs, where possible. However, should the company be unable to continue trading following its entry into administration, and subsequently enters a liquidation process, employees will be entitled to redundancy so long as they meet the qualification criteria (e.g. employed by the company for at least two years).
If the company does not have sufficient funds to cover this then statutory redundancy pay will be paid from a government fund known as the National Insurance Fund (NIF) to ensure employees are not left out of pocket.
How Real Business Rescue can help
If your company is experiencing financial difficulties and you are considering whether light touch administration could be an option, contact our expert team today. You can arrange a free consultation with a licensed insolvency practitioner who will be able to talk you through your options, which may include administration.
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