Since the introduction of the Enterprise Act 2002, the use of administrations for rescuing failing businesses has increased. Lawyers from DLA Piper highlight some of the legal issues arising out of the Allders case.
In recent years there have been several high-profile corporate restructurings including the likes of Jarvis, Leeds United Football Club and MyTravel, and insolvencies including MCI WorldCom, Unwins and Red Letter Days. In most cases the aim is to restructure or rescue failing businesses so as to restore and preserve jobs.
The largest retail insolvency in the UK in 2005, however, was the administration of the Allders Department Store group.
The administration procedure was introduced by the Insolvency Act 1986 as a mechanism for rescuing insolvent companies. However, given the requirement for an application to court and the cost, the number of administrations remained relatively small, even during the recession of the early 1990s, as many lenders continued to rely on their ’self-help’ remedy of appointing administrative receivers over a company.
The Government was keen to promote a ’rescue culture’, and the use of administrations as the primary procedure for rescuing businesses was at the heart of this. The Enterprise Act 2002 simplified the procedure to make it easier, faster and cheaper for a company to enter administration. From 15 September 2003, administrators could, subject to satisfaction of certain conditions, be appointed by the holder of a qualifying floating charge (usually a bank) or by the company itself or its directors without a court order by filing designated papers at court. Administrators can still be appointed by court order.
In addition, the Enterprise Act prohibited lenders from appointing administrative receivers pursuant to any floating charge taken on, or after 15 September 2003.
Since these provisions came into force the use of administrations has increased substantially, while the number of administrative receiverships has declined. Administration is now used in most cases where there is a possibility of rescuing the business.
Following appointment, administrators – typically partners in accountancy firms – act as agents of the company and take over responsibility for running the company from the directors, whose powers are suspended. They have a duty to all of the creditors of the company. Administration also provides a statutory moratorium, which prevents any creditor taking action against the company or its assets during the period of the administration without the consent of the administrators or leave of the court.
This is an exciting and diverse area of the law to work in. Any type of business can, at some stage, suffer financial difficulties. One day you could find yourself advising administrators on a manufacturing business, the next a hotel business and the next a retail business. The issues that arise cover all aspects of law, from corporate to employment, litigation to banking and property to pensions.
The Allders Administration
DLA Piper Rudnick Gray Cary was instructed to act on behalf of Andrew Pepper, Alastair Beveridge and Fraser Gray of Kroll, who were appointed as joint administrators of various companies within the Allders Limited Group on 26 January 2005.
Allders was a significant high street retailer trading from over 80 stores around the country. The administration of the group was precipitated by declining sales and the level of debt carried by the group. Numerous complex issues arose during the administration, which a team of more than 20 fee-earners from DLA Piper’s business support & restructuring (BS&R) team across the country was asked to advise on and deal with. These issues included:
- trading issues, which involved several solicitors working from Allders’ head office to assist the administrators with day-to-day issues as they arose;
- dealing with suppliers to the group, which were claiming reservation of title in stock supplied;
- the ongoing provision of credit and debit card facilities to the trading stores;
- dealing with customer deposits paid prior to and after administration;
- dealing with the relationships with the numerous concessions in each of the stores;
- dealing with the landlords to the group’s numerous leasehold stores;
- realising the assets, including a sale as a going concern of 10 stores to Bhs, eight stores to Debenhams and five stores to Primark;
- dealing with entitlement to proceeds of realisations as between secured lenders and advising on the validity of their security;
- employee issues, including pursuant to the Transfer of Undertaking (Protection of Employment) Regulations 1981 and pensions; andl whether sums due to employees in respect of redundancy should be seen as administration expenses.
Tim Dawson is an associate at DLA Piper Rudnick Gray Cary
Trading and appointment issues>
Within four months of joining DLA Piper’s BS&R practice, I was part of a large team working on the Allders administration. My initial responsibility was to get all the appointment documentation drafted and obtain the necessary consents so that the administrators could be appointed quickly to ensure that the business could continue to trade and to protect the value in the business.
Immediately following appointment, a team went down to the head office and our team on site required information and assistance in respect of issues arising. My main role was to liaise with the team and carry out, or distribute, work accordingly. We had to deal with lots of different queries on a day-to-day basis, including: issues arising in respect of the group pension fund; issues with various concession holders – for example, designer clothes retailers; monies held on deposit for the benefit of customers; alleged breaches of contract; patent and trademark issues; warranty claims; and employee disputes.
There were also numerous retention of title claims against the group companies, pursuant to which suppliers asserted that they owned goods that were in the stores. These claims all had to be investigated and either agreed, settled or resisted.
Liz Boyes is an assistant at DLA Piper Rudnick Gray Cary
Realisation of assets
The Allders administration involved the sale of various store operated by the group.
My main involvement related to the sale of various stores operated by the group. Initially my role was to assist with the sale of the business and assets at 10 stores around the country to Bhs. My primary role was to assist a partner and associate in the negotiation and drafting of the sale documents with the purchaser’s solicitors and to deal with the ancillary documents required on a sale of this type. I was responsible for the drafting and negotiation of these ancillary documents, which included board minutes, deeds of release of bank security and Land Registry forms. This role was very hands-on and allowed me to see the entire transaction from beginning to end.
The sale had to be completed in an extremely short timeframe – the entire process was managed in a little over 48 hours. At the same time, other teams were dealing with the sales to Primark and Debenhams and other interested parties. Once the sale to Bhs was completed, I was involved in drafting a sale agreement for another sale as part of a contract race for the eventually unsuccessful bidder.
I then dealt with the sale of another of the stores. This involved negotiating a complicated sale agreement and all of the ancillary issues and documents as the primary fee-earner. This involved the transfer of the leasehold interest in the property, as well as dealing with a simultaneous variation of the lease. It also involved the sale of all of the assets located at the store and negotiating the terms of the sale of those assets to the purchaser.
James Iremonger is an assistant at DLA Piper Rudnick Grey Cary
Within one week of joining DLA Piper I took up a role on the Allders job. I had to resolve a discreet point, raised by the Insolvency Service of the Department of Trade and Industry (DTI) as to whether certain liabilities due to employees on redundancy would constitute expenses of the administration.
The Enterprise Act introduced into the administration procedure for the first time the concept of administration expenses. Such expenses are payable out of floating charge realisations ahead of the claims of the preferential creditors and the holder of a floating charge. Therefore, what constitutes an administration expense, and the level of those expenses, can have a significant impact on dividends to the creditors of the company.
This was a significant issue in the Allders administration given the large number of employees. If such liabilities were held to be administration expenses then the amounts available for preferential and floating charge creditors would be reduced significantly.
Within 24 hours of receiving instructions to obtain a declaration on this point, I was before a High Court judge who was hearing representations between leading counsel for both the administrators and the Attorney General. A declaration in the DTI’s favour could have seriously damaged the use of administration as a rescue procedure. The court held that sums due to employees in respect of redundancy and unfair dismissal on the termination of a contract of employment by an administrator should not be regarded as administration expenses. The result was welcomed by the insolvency and banking professions, as it clarified a significant issue at the heart of the new administration procedure.
Julia McCabe is an associate at DLA Piper Rudnick Grey Cary