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COVID-19: template protocol for administrators to consent to directors exercising management powers during an administration
Practical Law UK Legal Update w-024-9959 (Approx. 3 pages)
COVID-19: template protocol for administrators to consent to directors exercising management powers during an administration
| Law stated as at 15 Apr 2020 • England, Wales |
The Insolvency Lawyers Association (ILA) and City of London Law Society (CLLS) have published a template consent protocol to facilitate a 'light-touch' administration of companies during the COVID-19 lockdown.
The Insolvency Lawyers Association and City of London Law Society have published a template form of consent for use where administrators wish to allow directors to exercise management powers while the company is in administration (Consent Protocol). The Consent Protocol was drafted by Mark Phillips QC, William Willson and Stephen Robins of South Square and is subject to ongoing review.
Directors cannot exercise management powers without the administrators' consent (paragraph 64, Schedule B1, Insolvency Act 1986). Consent is not ordinarily given. However, where a company's difficulties stem from the COVID-19 lockdown, consent may be appropriate.
The idea is that the directors will continue to conduct the day-to-day management of the company's business and thereby save costs. The administrators would conduct a light-touch administration, undertaking only essential duties and supervising the directors' attempts to stabilise and rescue the company.
Consent should only be given where administrators are satisfied that the company can be rescued as a going concern and has sufficient working capital to pay key post-administration costs and expenses such as rent, employee salaries, utilities and suppliers on an ongoing basis.
In this event, the Consent Protocol may be used as a starting point. As always, administrators will need to consider each case individually and may wish to take legal advice on the exact form of any consent to be given.
The main features of the Consent Protocol are:
- The powers that the directors can exercise (and any limits imposed). Suggested powers include:
- the sale and purchase of stock-in-trade;
- the performance of contracts in the ordinary course of business; and
- the payment of employee salaries and other services received.
- The conditions for the exercise of those powers. Suggested conditions include:
- an overarching condition that the powers granted can only be exercised for the purpose of achieving the rescue of the company as a going concern;
- a condition that the directors update the administrators regularly on the company's business, notify them of any threatened or actual termination by contractual counterparties and inform them of anything that might suggest the rescue of the company is no longer a reasonable prospect; and
- a condition that the directors obtain prior written consent from the administrators before paying salaries to or transacting with the directors or connected parties.
The notes to the Consent Protocol anticipate that once the COVID-19 lockdown is lifted and things begin to return to normal, the light-touch administration could be supplemented by a company voluntary arrangement or a scheme of arrangement to compromise or reduce the company's liabilities and secure its long-term viability.