Light touch administration refers to the approach of the government and regulatory bodies to regulate certain industries with minimal intervention. This approach is intended to promote innovation and economic growth while allowing businesses to operate with greater flexibility.
The Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are the two main regulatory bodies in the UK that adopt a light touch approach in their oversight of certain industries such as banking and finance.
An example of light touch administration in the UK is the approach taken by the FCA and PRA towards fintech companies. These companies are relatively new and operate in a rapidly changing sector, so the regulatory bodies have chosen to take a more flexible approach in their oversight.
This has allowed fintech companies to innovate and grow without facing the same level of regulation as traditional banks and financial institutions. However, there have been criticisms that this approach could lead to lack of oversight and increase in the risk of fraud and financial crime
How does the light touch administration process work?
The company would still enter administration as usual and continue to be governed by the same laws, but management would not be replaced as is customary. The notion was that by entering into administration, the firm would benefit from the protection it offers against creditors, and that the directors would be crucial in guiding the company out of it.
It’s important to note that the administrators will continue to bear ultimate responsibility for the company’s decisions. As a result, they will always have full control and can intervene at any time and change or revoke any consent.
The idea is based on Schedule B1 Paragraph 64 of the Insolvency Act of 1986, which prohibits a corporation under administration or its directors from acting in any managerial capacity without the administrators’ approval.
In a “light touch” administration, the administrators essentially give the board permission to use specific powers within predetermined bounds, allowing the board to continue managing the business on a day-to-day basis under the administrators’ supervision.
Not all organisations will be suited to light touch administration. Administrators will only consent to it if they genuinely believe the business can eventually be saved as a going concern and emerge from administration.
Thus, it may be advantageous for companies that are otherwise viable but are under stress from being compelled to close during a lockdown.
How is light touch administration different to other types of administration?
Light touch administration is quite similar to other, more well-established administration methods in many ways, but the main distinction is the management authority that is in place while the company is under administration.
In contrast to other kinds of company administration, the light touch procedure allows directors to maintain control over the day-to-day operations of the company rather than giving it to the designated administrators. For business owners who are confident in their company’s long-term survival and want to continue operating while avoiding the fear of legal action from creditors, this is a very alluring offer.
The designated administrators of the firm will continue to be in charge of overall management of the company’s affairs while it is in administration, even though the light touch method enables the current owners to maintain control of the day-to-day operations of the business. This can imply that there are restrictions on who can access corporate funds.
The reasons for the company’s present financial issues and the state of the firm generally before and during Covid-19 will be taken into consideration when determining the scope of these constraints on a case-by-case basis.
Read more: What is a Company Administration
What does light touch administration mean for staff?
As with other administration processes, a business may only participate if it can fulfil one of the three statutory goals outlined in The Insolvency Act of 1986:
- saving the business and keeping it operating
- obtaining a more favourable outcome for creditors than would be attainable if the business was closed without first going through administration
- Realising assets in order to distribute money to secured or priority creditors
The main objective of many businesses that go into administration is to preserve the business and, hence, as many employment as feasible. Employees will, however, be eligible for redundancy if they meet the requirements if the company enters administration but is unable to continue operating after that point and goes through a liquidation procedure (e.g. employed by the company for at least two years).
To make sure employees are not left out of pocket, statutory redundancy pay will be paid from a government fund known as the National Insurance Fund (NIF) if the company does not have enough money to do this.
Read more: What is a Pre Pack Administration
Conclusion
The use and success of a light-touch administration by UK companies depends on the powers that administrators are willing to grant to existing management. This approach is being closely watched, as it is currently being implemented by UK high street retailer Debenhams, which entered a light-touch administration on April 6, 2020. The conditions attached to the exercise of such powers will also play a significant role in determining the success of the light-touch administration.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.