Magazine article Management Today

Creditable Prospects

Magazine article Management Today

Creditable Prospects

Article excerpt

The protection from creditors which the Court recently provided for Sock Shop was considerable. But a real prospect of survival must exist and not all over-borrowed companies are so lucky. Chris Arnheim

Sock Shop started the year looking for a new equity partner to reduce its gearing, following a sales downturn and a disastrous foray into the US. By mid-February its white knight had failed to ride into view and trading receipts were no longer sufficient to meet current liabilities.

Then, in a move which is likely to become increasingly common as over-borrowed companies seek to win time to arrange for the injection of additional finance, Sock Shop turned to the High Court for protection from creditors. On 21 February, the Court appointed administrators who took over control of the company from its founders, Sophie Mirman and her husband, Richard Ross. Sock Shop shares were suspended at a price of 34p, valuing it at a mere [British pounds] 7.5 million.

Although there is some argument as to whether the administration procedure is the UK equivalent of chapter 11 of the US bankruptcy code -- given that there are numerous technical differences between them -- both procedures do serve substantially the same purpose. They give a company a brief respite, just when the pack of creditors are ready to tear it apart.

In deciding whether to make an administration order, the Court is required by law to consider whether one of the prescribed statutory purposes may be achieved if the company is given breathing space. The prescribed purposes include the following: to enable the company to reach agreement with its creditors; to preserve its business for sale as a going concern; or to make possible a better realisation of its assets than would be likely in a sale by a receiver or liquidator.

Under the Insolvency Act, the Court can only make an order appointing administrators if it considers it likely' that one of the specified purposes will be fulfilled. This has given the courts some problems. In recent cases, lawyers have considered whether likely' in this context means 'more than a mere possibility' or 'more likely than not', whether it requires a 'real prospect' or only a modest threshold of probability' -- demonstrating the legal niceties that have established the reputation of the English legal system. The present position is that expert evidence must be submitted to show that a 'real prospect' exists before an administration order can be made.

The Sock Shop petition was supported by a Binder Hamlyn report which indicated that the company had a 'real prospect' of survival. The Court accepted the evidence and appointed administrators. Its position was in contrast to that of the Kentish Property Group (KPG), which was caught short when the Docklands property bubble burst. KPG pre-sold its developments, collecting deposits on sales, before construction was completed. Falling sales and soaring interest rates destroyed the company's finances and led to two of its financial backers appointing receivers over developments they had funded. Faced with this KPG sought court protection. However the amounts required to complete the developments were substantial and the Court found that there was no real prospect that finance on this scale would be made available to KPG. …

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