Insolvency Outcomes: Research Findings

1
Insolvency OutcomesResearch Findings

• Dr Sandra Frisby
• Baker McKenzie Lecturer in Company and
  Commercial Law
• University of Nottingham
• 27 July 2006

2
The Research Programme

• 2063 Companies
• 953 companies in administrative receivership
• 1110 companies in administration
• Procedures entered into between September 2001
  and September 2004
• Comparison between pre- and post-Enterprise Act
  outcomes
• 27 Interviews
• Bankers and Insolvency Practitioners
• Telephone contact with receivables financiers

3
The Database
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Trends Relating to Companies

• Business Sectors
• High incidence of printing firms
• Locations
• 14 of all companies located in London
• 11 of companies located in Manchester,
  Birmingham, Leeds, Bristol or Nottingham
• No significant variation from general
  incorporation trends

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Appointment Trends Administrative Receivership
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Appointment Trends Administration

• Method of Appointment
• 58 Company/Director appointment (para.22)
• 30 Court appointment (para.12)
• 12 Charge Holder appointment (para.14)
• Going behind the figures
• Para.22 appointments may be charge holder driven
• Non-interventionist stance from charge holders
• Para.14 appointments trusted practitioners
• Para.12 appointments Additional legitimacy?

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Firms Appointments Entire Sample
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New Entrants Post-Enterprise Act

• 69 new firms taking administration appointments
• 21.8 of the 710 post-Enterprise Act
  administrations
• Comparison with entire sample
• 63 Company/Director appointment
• 31 Court appointment
• 6 Charge Holder appointment
• Absence of charge holder?
• Comfortably secured charge holders?

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Duration of Procedures Comparison

• Significantly longer duration in administrative
  receivership
• Average of 558 days as compared to average of 377
  days in administration
• The Brumark effect
• Similar impact on both procedures?

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Pre- and Post-Enterprise Act Durations

• All Administrative Receiverships
• 17 of cases lasting over 3 years
• 15 of cases lasting over 2 years
• 48 of cases lasting over 1 year
• 20 of cases lasting less than one year
• All Administrations
• 6 of cases lasting over 3 years
• 3 of cases lasting over 2 years
• 22 of cases lasting over one year
• 69 of cases lasting less than one year

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Pre-Enterprise Act Administrations
16 over 3 years 11 over 2 years 30 over 1
year 43 under 1 year
12
Post-Enterprise Act Administrations
18 over 1 year 82 under 1 year
13
Secured Creditors Profiles

• Fragmentation of Security
• Receivables financiers
• Brumark
• More effective method of lending
• Hire purchase/leasing
• Bondholders/Debt Traders
• Effects
• Multiple agendas?
• Easier withdrawal?
• Incentives to withdraw (termination fees?)

14
Secured Creditors Returns

• The Brumark Effect
• Administrative receivership
• 100 return in 22.6 of sample
• Zero return in 0.7 of sample
• Administration (pre-Enterprise Act)
• 100 return in 29.9 of sample
• Zero return in 0.9 of sample
• Administration (post-Enterprise Act)
• 100 return in 36.8 of sample
• Zero return in 0.7 of sample

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Preferential Creditors

• Average of 11.2 return across entire sample
• Average of 6.7 return in receivership and 15.9
  in administration
• Absence of secured creditors in some
  administration cases
• The Position of the Crown
• Loss of minimum 28.5m per annum as a result of
  abolition of preferential status
• Approach to troubled companies generally
  supportive, but inconsistent
• No change in approach post-Enterprise Act?
• No appearance of monitoring

16
Unsecured Creditors

• Returns
• 3.3 average return
• Zero return in 28.9 of cases
• Approach
• Interviewee comments
• Passive/Disinterested
• Prescribed Part
• 25 cases recorded
• One distribution of 5.8 of total unsecured debt
• Average distribution on estimated prescribed
  part would be 2.13 of unsecured debt

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Insolvency Outcomes General

• Possible Outcomes
• A) Rescue of the company
• B) Rescue of part of the company
• C) Going concern sale of the business of the
  company
• D) Going concern sale of part of the business of
  the company
• E) Asset sale
• F) Procedure ongoing

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Outcomes in Administration Entire Sample
53 liquidations 40 business rescue 3
corporate rescue 4 unknown
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Outcomes in Receivership Entire Sample
54 liquidations 41 business rescue 5
unknown
20
Pre-Enterprise Act Administration Outcomes
44 liquidations 45 business rescue 4
corporate rescue 7 unknown
21
Post-Enterprise Act Administration Outcomes
56 liquidations 38 business rescues 3
corporate rescues 3 unknown
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Corporate Rescue Views

• Informal rescue activity by the banks
• Ongoing, and generally viewed as successful
• Use of the CVA
• Viability of proposal
• Unworkable proposals may deter future creditors
• How realistic is corporate rescue through formal
  insolvency?
• Attitudes of creditors
• Insolvency-related depreciation
• Late entry into the procedure
• Possibility considered but rarely achievable

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Business Rescue Pre-Packs

• Trends towards pre-packaging
• To independent purchasers
• To connected parties
• Advantages of pre-packs
• Preservation of goodwill and avoidance of costs
• Encouraging a rigorous procedure through
  accountability
• Preservation of employment?
• Better realisations?
• The second-chance ideal?
• Disadvantages of pre-packs
• Lack of transparency
• The image problem
• Subsequent insolvency of Newco?

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Administrations as Disguised Liquidations The
Phenomenon

• Explaining the higher incidence of asset sales in
  post-Enterprise Act administrations
• Using administration instead of CVL
• Higher incidence of company/director appointments
  
• Non-interventionist stance of charge holders
• Low barrier to entry into administration para.
  3(1)(b) Schedule B1 Insolvency Act 1986

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Disguised Liquidations Incentives and Evaluation

• The Leyland Daf effect
• Costs and expenses (including fees) payable out
  of floating charge
• 55 asset sales pre-Leyland Daf compared to 62
  post-Leyland Daf
• But are there significant floating charge assets
  anyway?
• Securing the appointment
• Avoiding the s.98 meeting
• Commercial advantage
• Speed
• Opportunities for trading
• Preservation of contracts
• A New Entrant Phenomenon?
• Higher rates of asset sales, but inconclusive
• Do we need the CVL?

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Conclusions

• Significant drop in duration of administration
• Large number of new entrant firms
• No detrimental effects for secured creditors
• No rise in incidence of corporate rescue
• Both administration and receivership equally
  likely to result in a business rescue
• Trend towards pre-packs
• Trend towards disguised liquidations