Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

UK gearing up for major corporate liquidations in ‘unpredictable times for the insolvency sector …’

In what appears to be ominous but necessary preparation for the continued economic consequences of COVID-19, the UK Insolvency Service is seeking insolvency practitioner firms to take on the role as special managers under the Insolvency Act 1986.  A Special Manager Panel is being established to support the Official Receiver in the complex insolvencies to which it is appointed under the Act arising from compulsory liquidations.

The Service explains that

‘these are unpredictable times for the insolvency sector, and we do not know how many highly complex cases requiring special manager assistance the Official Receiver may receive’.

Applicants for the panel “must be able to offer market-leading insolvency expertise and services in order to support the Official Receiver in the most complex and challenging compulsory liquidations”.

It asks that

‘only those organisations capable of taking the largest appointments at short notice devote time to applying’, including the capacity to mobilise ‘75+ corporate insolvency staff across multiple UK sites, with little notice’.

The deadline for applicants is close, 30 September 2020.

Collapses of socially and economically important enterprises

My article Major corporate collapses and the public interest – British Steel and more discussed the collapses in the UK of socially and economically important enterprises – British Steel, Carillion Constructions and Thomas Cook are current examples – which raise many public interest issues that are managed by the joint conduct of the liquidations by the government Official Receiver and private insolvency firms.

In the UK, on the court making a winding up order, the Official Receiver becomes the liquidator automatically under section 136 of the Insolvency Act 1986, and the OR may then apply for special managers to be appointed to assist it, under s 177, on a report setting out the reasons for the application.[1] Typically these matters are large and complex and beyond the resources of the OR and they typically raise matters of risk and money.

‘forerunners of a new era ‘?

In the UK, even before COVID-19, it has been asked whether British Steel, Carillion and Thomas Cook are

‘forerunners of a new era where we see liquidation become more prevalent [rather than administration] particularly where public interest issues are involved? … perhaps because of the existence of concerns over some aspect of their business or because no IP will take on an appointment as administrator?’.[2]

The PWC special managers of Carillion have in fact identified some common factors as supporting that OR-special manager structure –

‘the structure of those companies, the nature of the external debt in those businesses and the underlying operational risk’

which when combined meant that when these companies could not continue as going concerns there was no appetite for the external debt holders or shareholders to step in and fund a solution.[3]

A lack of free cash adds to the financial risks for the insolvency practitioner and a lacking of remaining funds per se.

In Thomas Cook, the government had indicated that, while it would not fund an administration, it would provide the support necessary for an insolvency process which involved the Official Receiver being appointed as a liquidator.

Operational complexity makes some appointments risky for insolvency practitioners to take on. In the Carillion group, there were 379 companies in the group, many overseas, with 18,000 UK employees and over 40,000 employees worldwide, across diverse services including construction, facilities and fleet management, legal services, and schools and hospitals where continuation of services was a priority.[4]  It became the largest trading liquidation in UK corporate history, handled by the Official Receiver as liquidator, with assistance from PwC as special managers.

Likewise, the repatriation of the 150,000 Thomas Cook passengers was a significant public interest issue, and operational risk, with the High Court making orders,[5] as a matter of urgency at 1.47am on 23 September 2019, on the application of the Official Receiver appointing AlixPartners and KPMG as special managers, with each assuming responsibility for particular parts of company’s operations.

Environmental risk is a significant driver. Sahaviriya Steel Industries (SSI) at Teesside had been one of the country’s biggest iron and steel making sites, its collapse costing 3,000 jobs and with the fallout from its site occupation continuing.[6] Likewise in the steel sector, British Steel had significant production and environmental risks – as a ‘highest risk’ site –

‘its furnaces and coke ovens contained pyrophoric iron sulphide and methane and needed to be maintained at pressure, which would be lost if the plant were shut down; the site was prone to flooding; and there were very significant amounts of hazardous materials, including effluent lagoons and asbestos’.

Risk options

While undue risk can prompt an IP to shut down operations from a purely commercial perspective, the need to maintain services meant this was not an option in Carillion or Thomas Cook; and likewise environmental problems need careful close-down attention, assisted by the liquidators, assuming they are funded to do so.

It is said that the Official Receiver’s willingness to trade a business to allow a more orderly closure compared with an immediate shut down can result in less severe consequences for creditors, with some dividends paid across a small number of entities within the Carillion group.

The OR-special manager arrangement

The OR-special manager arrangement has come under some scrutiny, with a call being for it to be “subject to wider reflection and debate”.[7]

That was pre-COVID-19.  The new Special Manager Panel appears to indicate a recognition that the current economic crisis calls for greater government involvement in light of what may be seen as the positive handling of the major public interest issues in each of Carillion, Thomas Cook and British Steel – issues that are not just about money, the typical focus of many an insolvency.

As Millett J has said[8],

“The liquidation of an insolvent company can affect many thousands, even tens of thousands, of innocent people. … In the case of a major trading company it can affect its customers and suppliers and the livelihood of many thousands of persons employed by other companies whose viability is threatened by the collapse of the company in liquidation. An insolvent liquidation cannot be dismissed as “just a case about money””.

Australia

It should be noted that Australia has never had an Official Receiver in corporate insolvency, hence this type of arrangement is not an option. Thus far, the government action has been to extend insolvency protections until 31 December 2020.

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[1] Rule 7.93(1) of the Insolvency (England and Wales) Rules 2016.

[2] See British Steel: is it a wind up? Professor Andrew Keay and Professor Peter Walton, Corporate Rescue and Insolvency, August 2019.

[3] Special Managers the New Administrators, David Kelly and Mike Jervis pwc.co.uk

 

[4] Sovereign Hospital Services was part of the Carillion group to which special managers were appointed: Sovereign Hospital Services Ltd v The Official Receiver [2018] EWHC 815 (Ch) (02 February 2018).

[5] Re Thomas Cook Group Plc & Ors [2019] EWHC 2626 (Ch) (23 September 2019)

[6] Fate of derelict Teesside steel site goes to public inquiry, Financial Times, 10 February 2020

 

[7] Thomas Cook’s collapse and airline insolvency – lessons for the UK Stephen Parker, Watson Farley & Williams, London sparker@wfw.com

[8] Lord Millett, In re Barlow Clowes Ltd [1992] Ch 208.

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