Vol 9 (2012) - Issue 3

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Administration Falls Short: The Need for Contractual Stability and an Executory Contract Regime

Since September 2008 and for self evident reasons, the UK insolvency and restructuring legal regime has been more in the public eye than probably ever before. UK politicians of all hues, academics and trade bodies have put forward ideas. The focus has often been on how the insolvency legislation could be improved to promote successful restructurings – a universally accepted laudable goal.

Administration falling short as a trading restructuring process
The UK’s main restructuring tool is administration, as demonstrated by its primary purpose being 'rescuing the company as a going concern'. Whilst rescuing the company almost never happens, administrations do more commonly manage to rescue the business. However, arguably administration has become more of a 'deal delivery tool' rather than a restructuring process, especially for larger companies. In other words, administration’s main use has been for pre-packaged sales, and not trading administrations. There are one or two examples of sizeable trading administrations, e.g. Nortel, but they are the exception not the rule and a trading administration is seen as a last resort as it is too value destructive. At risk of overstating it to make the point, a UK trading administration is not really a restructuring tool – certainly not in the way that US Chapter 11 is and more recently French sauveguarde has become. So does this indicate that there is something lacking with UK administration? Before tackling the issue, in some ways the question itself might seem a little curious. After all, European companies migrate their COMIs to the UK to take advantage of UK administration. With only one or two exceptions, the reverse is not seen - UK companies do not migrate COMIs overseas. Does that not indicate that UK administration is 'best in class' in Europe? The answer is probably 'yes', but importantly companies migrating to the UK do so to use the pre-packaged sale process – as happened for Wind Hellas. Companies do not migrate their COMIs to the UK to enter a trading administration. So, COMI migrations actually demonstrate how UK administration is indeed a deal delivery tool (i.e. a pre-packaged sale) and not a trading restructuring process. This article proceeds on the basis that, despite its attractiveness for providing a quick sales process, UK administration falls short as a trading restructuring process. So what could or should be changed to improve the situation? Over time, commentators have put forward various ideas – the most common being some form of priority liquidity funding, i.e. debtor in possession funding. This article does not go over that ground again, rather it focuses on the less talked about, but just as important, issue of executory contracts. Broadly, these involve continuing obligations on both sides of the contract, e.g. on-going supply, service, sale or purchase contracts.

Need for contractual stability
A lynch pin of any restructuring process is stability – both stability from litigation and stability vis-à-vis the business operations. The UK administration moratorium regarding legal process is strong and effective to stabilise the company against hostile counterparties. By marked contrast, there is almost no protection for the business operations. What is at the heart of a company’s business? It is the web of contracts that the company has built up over time: suppliers, service providers, customers and so on. For sizeable companies, often there are hundreds, if not thousands, of contracts and they are critical to the company’s business and its value. Lose the contracts and the company’s business may be at an end, certainly value is greatly diminished. Also, the volume of such contracts can make it extremely challenging to deal with too large a proportion simultaneously. Both of these points start to explain why contractual stability is crucial to an effective trading restructuring process.