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Study of Administration Cases

Study of Administration Cases. Alan Katz and Michael Mumford Research Fellows ICRA Lancaster University. Background and purpose of study. Big increase (Admins) pre + since Sep 2003 Accelerating trend since Sep 2003

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Study of Administration Cases

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  1. Studyof Administration Cases Alan Katz and Michael Mumford Research Fellows ICRA Lancaster University

  2. Background and purpose of study • Big increase (Admins) pre + since Sep 2003 • Accelerating trend since Sep 2003 • Is this a shift from AR (intended), from CVL (generally not explicitly intended) or both? • Consider what the shift from AR achieved • Consider issues raised by the shift from CVL • Empirical work - How is Administration being used? • Does the shift from CVL matter? Is there abuse? (Need to define abuse). • Other empirical observations – uses of Administration

  3. Michael Mumford Research Fellow ICRA Lancaster University FCCA Accountant / economist in industry Career in teaching and research – Lancaster University Management School

  4. Main statistical findings Two trends in evidence pre Sep 2003 Increased at marked and statistically significant rates since Sep 2003 • A pre-existing but slight move from CVL to administration • A pre-existing but substantial move from AR to Administration.

  5. Pilot study • Indicated major shift from AR but also from CVL • Indicated reasonable availability of public record data on background and reasons for administration • Indicated a number of cases where administration was prima facie hard to justify • Led to full study • More extensive statistical analysis • Empirical study of Admin Cases

  6. % of Admin to Admin + AR 2002

  7. % of Admin to Admin + AR 2005

  8. % of Admin to Admin + CVL2002

  9. % of Admin to Admin + CVL 2005

  10. % of all Corporate Insolvencies 2002

  11. % of all Corporate Insolvencies 2005

  12. Detailed Analysis shows • Trends are steep and statistically significant • 4 fold increase in Admin numbers 2002 – 2005 • Up from 3.5% to 14.4% of total • Draws more from reduction in CVLs than from reduction in ARs • Large, statistically significant upward shift after Sep 2003. (increase in the rate of increase). • See best fit graphs

  13. Alan Katz Research Fellow ICRA Lancaster University FCA Former full time Licensed IP

  14. Empirical work • Mainly on the shift from CVL • Includes commentary on the shift from AR • Includes commentary on and some measure of the significance of prepacks

  15. Concerns re Abuse Accountancy Age March 2004 – Figures show that creditors are being robbed of rights. Insolvency Service – Dear IP No 17 – March 2004 Possible abuse. No evidence to date. Report it. Avoids / reduces effectiveness of creditors meeting Timescale discourages proper investigations

  16. Abuse • Not necessarily correlated with any procedure • Motives difficult to detect from isolated cases • Need distinguish between abusive conduct and what may be issues of statutory compliance • Abuse is to some extent in the eyes of the beholder – lack of agreed definition

  17. What is the abuse/mischief? - Failure of statutory compliance – lack of agreed definition unhelpful - Denying creditors any real choice of IP – differing views on importance - Avoiding effective scrutiny-quality/value - Failing to pursue delinquent directors for recoveries and reporting

  18. Study / Empirical evidence • How Admin is actually being used • And we review statutory framework that itself gives rise to some of the concern about abuse

  19. Methodology • 100 cases – appointments in 2004 • Random – Source Gazette online • Analyse insolvency notices and reports that should / generally do indicate reasons for going the admin route • Contact IPs – only for clarification / completeness checks • Not second guessing the IP but review of support and internal cross checking • Objective criteria – still some judgements at the margin

  20. Analysis includes ? Purpose included rescuing company ? Business rescue part of strategy ? Included trading ? Other factors enhancing realisations ? Secured / pref involvement in appointment ? Court involvement in appointment Asset size – to compare number and value

  21. Results – Clear Justification Total:Number57%:Value94% ================================= Of which – Business rescue – trading N = 31%; V = 74% (includes all co rescue) ========================= Business rescue – non trading but result not available in CVL N = 10%; V = 7%

  22. Clear justification ctd Total:Number57%;Value94% ================================= Of which Non business rescue – other enhancements N = 9%; V=12% QFCH sole justification N = 7%; V = 1%

  23. Probable Justification Business rescue part of plan; no indication that not also achievable in CVL – generally accepted per the literature as justified and a purpose of Admin; N = 14%; V = 3% Clear + Probable – Revised total N = 71%; V = 97% ============

  24. Very weak / no justification N= 29%; V = 3% • 8 invoked objective 3(1)c (secured or pref) but no indication of behest / distribution • 4 minimal / unquantifiable benefit • 17 no justification – liquidation in terms

  25. Smaller case issue But • 29% is >800 cases pa at 2006 levels • Absolute amounts involved – average £65k is not negligible

  26. The Leyland Daf factor • Not explicit on any case • Potentially affected results from March 2004 • Proportionately twice the rate of weak and no justification in last 3 quarters than in first (but small sub sample) • Stats show that while the marked trend from CVL to Admin continued after March 2004, the rate of increase in fact declined

  27. Clarity / Issues for Regulators and policy • What is the “official line?” • Concern re stretching the statutory criteria? • Is 3(1)(c) a justification alone – where there might in principle be a distribution? • In any event, less serious than abusive case conduct • Lack of clarity, differences of approach – issue of fairness to IPs • Should the statutory criteria be changed? • What is the logic of restricting access? • Does it matter if CVL withers? • Why discriminate against smaller cases? • Regulation– Should focus increasingly on conduct – substance over form.

  28. Other findings • Quality of reports • Volume of remuneration (SIP 9) info

  29. Shift from AR to Administration Almost as significant as shift from CVL Intended Evidence of achievement / enhanced results? Little if any, as yet. Possible area for further work – but value of such work is likely to be for information only – no-one expects AR to be re-introduced.

  30. Prepacks Love them or hate them, but don’t ignore them. Our work shoes that they were significant, in 2004 and are thought to be increasingly prevalent. The subject of current R3 sponsored research

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