Insolvency Outcomes: Research Findings Dr Sandra Frisby Baker & McKenzie Lecturer in Company and Commercial Law University of Nottingham 27 July 2006

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

The Database

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

Appointment Trends: Administrative Receivership

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’?

Firms Appointments: Entire Sample

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?

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?

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

Pre-Enterprise Act Administrations 16% over 3 years 11% over 2 years 30% over 1 year 43% under 1 year

Post-Enterprise Act Administrations 18% over 1 year 82% under 1 year

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?)

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

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

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: 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: Entire Sample 53% ‘liquidations’ 40% business rescue 3% corporate rescue 4% unknown

Outcomes in Receivership: Entire Sample 54% ‘liquidations’ 41% business rescue 5% unknown

Pre-Enterprise Act Administration Outcomes 44% ‘liquidations’ 45% business rescue 4% corporate rescue 7% unknown

Post-Enterprise Act Administration Outcomes 56% ‘liquidations’ 38% business rescues 3% corporate rescues 3% unknown

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

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?

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

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?

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’