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Insolvency Insolvency Outcomes:Outcomes:Research Research FindingsFindings
Dr Sandra Frisby Dr Sandra Frisby Baker & McKenzie Lecturer in Company and Baker & McKenzie Lecturer in Company and
Commercial LawCommercial LawUniversity of Nottingham University of Nottingham
27 July 200627 July 2006
The Research ProgrammeThe 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
Trends Relating to Trends Relating to Companies 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
Appointment Trends: Appointment Trends: Administrative Receivership Administrative Receivership
Receivership Appointors
40%
20%
17%
12%
5%4% 2%
Major Clearing Bank
IndependentFactor/ Invoice Discounter
Other Bank or CreditInstitution/OverseasBank
Corporate Charge Holder
Venture Capital Provider
Individual Charge Holder
Bank Invoice Discounter
Appointment Trends: Appointment Trends: Administration 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’?
Firms Appointments: Entire Firms Appointments: Entire SampleSample
Firms
29%
9%
5%
5%5%
3%
3%
3%
3%
3%
3%
3%
3%
3%
2%
2%
2%
2%
2%1%
1%1%
1%1% 1% 1%1% 1%1%
Other
Begbies Traynor
Pricew aterhouseCoopers
BDO Stoy Hayw ard
KPMG
Baker Tilly
Kroll
Grant Thornton
Poppleton & Appleby
Tenon Recovery
HKM Harlow Khandhia Mistry
Mazars
RSM Robson Rhodes
Ernst & Young
Smith & Williamson
PKF
DTE Leonard & Curtis
Hacker Young
Deloitte
Rothman Pantall & Co
Casson Beckman & Partners
Numerica
Cranf ield Recovery
Thompson Shaw Associates
Fisher Curtis
Moore Stephens
P & A Partnership
David Rubin & Partners
Geof f rey Martin & Co
New Entrants Post-New Entrants Post-Enterprise Act 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?
Duration of Procedures: Duration of Procedures: ComparisonComparison
• 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?
Pre- and Post-Enterprise Act Pre- and Post-Enterprise Act DurationsDurations
• 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
Pre-Enterprise Act Pre-Enterprise Act Administrations Administrations
Pre- EA Administrations
16%
15%
12%
11%
10%
9%
6%
6%
5%
5%
3%
1%
1%
Over 36
10 to 12
4 to 6
7 to 9
19 to 21
13 to 15
16 to 18
25 to 27
22 to 24
0 to 3
28 to 30
31 to 33
34 to 36 16% over 3 years11% over 2 years30% over 1 year43% under 1 year
Post-Enterprise Act Post-Enterprise Act Administrations Administrations
Post-EA Administrations
65%
9%
8%
8%
7%
2%
1%
0%
10 to 12
13 to 15
16 to 18
7 to 9
4 to 6
0 to 3
19 to 21
22 to 24
18% over 1 year82% under 1 year
Secured Creditors: ProfilesSecured 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?)
Secured Creditors: ReturnsSecured 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
Preferential CreditorsPreferential 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
Unsecured Creditors 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
Insolvency Outcomes: Insolvency Outcomes: General 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
Outcomes in Administration: Outcomes in Administration: Entire SampleEntire Sample
Administration Overall
53%
31%
4%
5%
3%3%
1%
0%
0%
E
C
F
D/E
A
C/E
D
B/E
B
53% ‘liquidations’40% business rescue3% corporate rescue 4% unknown
Outcomes in Receivership: Outcomes in Receivership: Entire SampleEntire Sample
Receivership Overall
54%
32%
5%
5%3%
1%
0%
E
C
D/E
F
C/E
D
A
54% ‘liquidations’41% business rescue5% unknown
Pre-Enterprise Act Pre-Enterprise Act Administration OutcomesAdministration Outcomes
Administration Pre-EA
44%
29%
9%
7%
5%4%
2%
0%
E
C
D/E
F
C/E
A
D
B/E
44% ‘liquidations’45% business rescue4% corporate rescue7% unknown
Post-Enterprise Act Post-Enterprise Act Administration OutcomesAdministration Outcomes
Administration Post-EA
56%32%
3%
3%3%
2%
1%
0%
E
C
D/E
F
A
C/E
D
B
56% ‘liquidations’38% business rescues3% corporate rescues 3% unknown
Corporate Rescue: ViewsCorporate 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
Business Rescue: Pre-PacksBusiness 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?
Administrations as ‘Disguised Administrations as ‘Disguised Liquidations’: The Phenomenon 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
Disguised Liquidations: Disguised Liquidations: Incentives and EvaluationIncentives 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?
Conclusions 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’