When Rescue Becomes Repetition: Where Do We Draw the Line on Repeat Insolvencies?

The recent article by The Guardian on a UK recruitment business entering administration for a third time has prompted renewed scrutiny of an all-too familiar scene in the UK’s insolvency landscape…the repeat rescue.

For those working in insolvency this won’t be anything new. We see it all the time where a business fails, then is restructured and, in some cases, re-emerges under a new name but with the same people in charge, and the same underlying issues. I suppose you could argue that this is the purpose of our rescue culture - to preserve viable enterprises and protect employment wherever possible.

Pre-pack administrations have long been recognised as a legitimate and often effective tool in achieving those aims but when a business enters insolvency not once, but multiple times, the narrative begins to shift.

The legal standpoint

From a legal perspective, there is little wrong with a company being rescued more than once because each occurrence is assessed on its own facts.

Administrators may seek to preserve value through a sale, if that is more likely to achieve the statutory purpose of getting a better return from creditors than a liquidation would. The difficulty comes, from my perspective when a company is repeatedly rescued but no steps are taken to assess whether those in charge should be allowed to continue acting.

A creditor’s view

For creditors, repeat insolvencies can feel very unjust, especially where from the outside-looking-in, the creditors are the only ones that stand to lose out. Each iteration of the business may be legally defensible, but the cumulative effect will quickly erode confidence in its customers and suppliers.

Permissible v ethical

Pre-pack administrations have been subject to increased scrutiny over the years for precisely this reason. While they can deliver what’s required quickly (continuity, value preservation, etc.) they can also lack transparency.  

The introduction of tighter regulation, such as the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021 has gone some way to addressing these concerns however, it’s not a complete solution.

The more difficult question with pre-package rescue deals is where we draw the line between a genuine attempt to help a business, and what might be perceived as recycling failure.

It’s imperative that each scenario is looked at individually – what are the reasons for the failure, what’s been done in the past to address any underlying issues and to what level have creditors engaged previously.

It’s also important to look at what’s changed since the last attempt at rescue, and indeed, just as importantly what needs to change going forward. A second insolvency may be looked at through a very different lens compared to a third, or fourth!

Directors and business owners take note

Directors need to navigate this carefully and of course, seek legal advice as soon as there’s a risk of insolvency. Don’t let things escalate and remember your duty to the business overall.

Repeat failures with the same issues at their core, could invite closer scrutiny of your conduct and decision making and the reputational impacts can also be significant.

Putting the pieces back together (sometimes)

For insolvency practitioners, they face a hard job in balancing the interests of creditors with the commercial reality of the situation. The need for full transparency here is ever important along with robust justification for any decision making, particularly in repeat scenarios.

If you’re a creditor, I would go so far as to say that the main challenge for you is often visibility. Understanding how and why a business has re-emerged after a rescue effort and what’s changed isn’t necessarily straightforward. This complexity can lead to difficulties assessing risk in the future.

A close look at your terms and conditions and ensuring all the retention of title and control provisions have been incorporated into those terms will be crucial in minimising the impact of a debtor’s administration on your business.

As economic pressures continue to test businesses across sectors, particularly those with owner managers, or SMEs, we are likely to see more of this happening so remaining vigilant and adopting a culture of early and full disclosure will always help you in the long run, even if the worst were to happen.