Enterprise tact

The recent administrations of the Farepak companies have cast into question whether the Enterprise Act reforms to the administration procedure, set out in the 1986 Insolvency Act, add value for the creditors and whether they really do simplify and improve the process.

Farepak fallout
In the case of Farepak, the administrators from BDO Stoy Hayward were faced with a business with more than 100,000 creditors with claims on average of between £250 and £300. The business was a so-called ‘Christmas savings club’, where the customers ordered hampers, vouchers and gifts and paid over the year for orders to be delivered in December.

The company ran its business through 26,000 agents, with each agent on average dealing on a very informal basis with six or seven customers, who were often family members or work colleagues. There was a database of the agents with their names and addresses, but no reliable database of end-customer details, and therefore no details relating to the true creditor base. Creditors, who were predominantly customers, were owed sums in excess of £40m between them.

Following their appointment, the administrators considered what practical steps they should take with regard to the requirements to notify all creditors of their appointment pursuant to Paragraph 46(3)(b) of Schedule B1 of the Insolvency Act, to list the names of all creditors in the statement of affairs pursuant to Paragraph 47, to submit proposals to creditors within eight weeks, including some very technical information about administrations and fees, and to hold a creditors’ meeting pursuant to Paragraph 51. The costs of complying with these requirements would be considerable, and anyway what benefit would the general body of creditors get from such compliance?

The case has attracted a remarkable amount of interest in the press and in the Houses of Parliament in England and Scotland and the Welsh Assembly. ‘Loan sharks’ were already approaching those customers whose identities had been revealed in the press, and reports on the case on the internet seemed always to appear next to advertisements for loans or other savings schemes. Was it really in the interests of the creditors to list their names and addresses at Companies House so that loan providers would be gifted a customer database?

Creditor support
The administrators’ concerns were to ensure that creditors were fully informed of the process in the most cost-effective way possible and in a way that was understandable to them. They therefore made an application to court to have permission to dispense with a number of the statutory requirements referred to above. The application was heard by Mr Justice Lawrence Collins on 3 November 2006.

Collins J agreed that it was sensible to minimise the number of communications with the creditors given the numbers of creditors involved. He agreed to dispense with the requirement under Paragraph 46 to send notice of appointment to the creditors. He approved the administrators’ proposal to write to the agents notifying them of their appointment, enclosing copies of the letter and asking the agents in turn to distribute copies of the letter to their customers.

The administrators’ letter asked the agents and customers to write to the administrators confirming their details and their claims. The administrators would then be able to compile a database of customers, which would be supplemented by claims made by customers through the claims helpline, which was set up by the administrators to log details of customers’ claims and give out information on the administration and the communications received by email and post.

The administrators were appointed on 13 October 2006, and by 31 October the call centre had taken more than 10,000 calls, the administrators had received 22,500 emails and eight large storage boxes of post had been delivered to them.

The intention is that by the time the Paragraph 49 proposals are sent to creditors, the administrators will have a database with details of an increasing number of customers as well as agents, which can be cross-checked against the company’s database with the agents’ details. To enable this process to be more advanced by the time the proposals are sent out, the time for dispatching the proposals has been extended to mid-January 2007.

The judge saw the sense in releasing the requirement to include the names and addresses of customers in the ‘statement of affairs’ and in the administrators’ report to creditors. He also agreed that a simplified proposal could be sent to creditors with the full detailed proposal appearing only on the website or to be sent to creditors who requested it by post.

The proposals are therefore going to be in a style and form that the creditors will understand and the costs of dispatch will be significantly less without the annexures that usually accompany the detailed proposals containing all the information on an administration and fees that the act requires.

Creditors’ meeting
Another key practical issue was the creditors’ meeting required by Paragraph 51. Where could this be held in a place “convenient to creditors” when the creditors were all over the UK – from Ullapool in the West Highlands of Scotland, to Cardiff, to Belfast and the South of England. The creditors could easily spend more than the amount of their claim on travel costs to attend the meeting and have to take time off work that they could ill afford. The creditors wanted to understand why the company had collapsed and whether they were they likely to get answers to this at the meeting.

The administrators took the view that, even if the directors were required to attend the meeting, they were likely to be advised to say very little and that there would be no real benefit for the creditors in view of the costs and expense of convening and attending the meeting.

Practically speaking, where would be big enough to hold the meeting if all of the customers attended? Unfortunately Wembley Arena, used for the BCCI creditors’ meeting, would not have been available or big enough, and in any event the hire would have been a waste of money if at the end of the day very few creditors actually attended.

Paragraph 58 allows the holding of a creditors’ meeting “by correspondence”, which is a new provision introduced by the Enterprise Act. The notes in Sealy and Milman: Annotated Guide to the Insolvency Legislation say: “Plainly, it can operate only where the number of creditors is small.” Unperturbed by this, the administrators suggested to the court that it was a solution in this case to reduce the costs and expense of the meeting, and the Judge agreed.

Finally, communication throughout the administration is permitted by correspondence with the agents and by posting on the website to minimise costs and expense.

This is a good example of the courts taking a constructive approach to the new provisions when faced with practical problems that arise from large-scale administrations. As a result of the directions made, the administrators hope that the creditors will not get to the end of the administration process feeling dissatisfied and finding themselves with three inches of paper and very little else to show for the experience.

Alison Goldthorp is head of reconstruction and corporate recovery at Taylor Wessing