Make Administration More Attractive to save Distressed Businesses

The COVID 19 pandemic continues to provide a challenging business environment globally. In a bid to cushion businesses from the effects of the pandemic, governments worldwide have come up with a variety of measures, most of which have been geared towards addressing liquidity shortages and enhancing access to capital. There is, however, growing concern that some of the measures which were geared towards addressing liquidity shortages and enhancing access to capital will lead to a significant rise in the debt levels of many businesses thereby predisposing the businesses to inability to pay their debts as they fall due.

The Insolvency Act, 2015 was enacted with a view towards reforming the manner of dealing with individuals and companies in financial distress. The Insolvency Act, 2015 seeks to provide an efficient and equitable way of dealing with the affairs of insolvent persons, with a view to properly balancing the interests of various stakeholders of such insolvent companies. Central to this aim, is the need to ensure that there is a balance between preserving viable businesses and quickly liquidating companies that are not viable to ensure that capital is redistributed to more viable businesses.

To achieve this objective, the Insolvency Act, 2015 introduced administration as one of the alternatives to the liquidation of companies. Administration is an insolvency mechanism where a qualified insolvency practitioner, referred to as an administrator, is appointed to manage the affairs and property of a company. The main objective of administration is to allow the company to continue trading as a going concern. Administration offers a lease of life to companies because of the protective measures available to companies when a company is in administration. These include a suspension of any applications to liquidate the company; a requirement to obtain leave of the court or the approval of the administrator before: a secured creditor takes steps to realize their security; or before a landlord forfeits a lease; or before a person begins any proceedings against the company; or before taking any enforcement action against the company, including executing a judgment. In addition an administrator may in certain circumstances have the power to deal with or dispose property charged to secured creditors and to deal with it as if it were not so charged.

There are however some factors that make administration as provided by the Insolvency Act unattractive. The most glaring one is that the owners of the business lose control of the business as the power of management is vested in the administrator. The administrator has wide powers which include the power to appoint and remove directors. Further, the company does not have absolute say in who is appointed as an administrator. If a company wants to appoint an administrator without going to court, it is required to give notice to certain classes of secured creditors, who may take the chance to jump ahead of the company by appointing their own administrators. In cases where the company has initiated administration and has succeeded in appointing its administrator, the creditors retain a right to replace the administrator with their preferred administrator. The courts have also held that a business must provide substantial proposals, including the financial proposal, as to how the company is to be maintained as a going concern or as to how the company proposes to settle with creditors in a better manner than a liquidator would. For companies that are already struggling, this requirement may be onerous. Administration also runs the risk of accelerating a company’s journey to dissolution or liquidation if the administrator forms the opinion that the objectives of administration cannot be achieved; or if the administrator’s proposal does not garner approval from the creditors. These factors may explain why a company would be hesitant to voluntarily take up administration, even when administration would be an appropriate rescue mechanism.

As governments continue to look to ways of ensuring the survival and continuity of viable businesses, it would be worthwhile to consider how rescue mechanisms provided in the insolvency Act, 2015, such as administration, could be made more attractive to businesses. In Australia, the government has come up with reforms which allow owners to retain control of their businesses by providing for an independent practitioner who helps SMEs come up with a restructuring plan, having carried out an independent assessment of the business, but without requiring the independent practitioner to assume control. Australia has also shortened the timelines for administration and has reduced complex requirements such as numerous creditors’ meetings. We could borrow a leaf and reform our law in this ways in order to encourage viable businesses in financial distress consider taking available business rescue mechanisms voluntarily.

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