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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

22 AUG 2009

A Letter on Administration to the Insolvency Service as reported by the Guardian

The Guardian newspaper has published a very interesting piece that will be of note to those interested in insolvency law reform. The piece is entitled "Insolvency Service urged to change payment rules for administrations - Confusion reigns over who pays for what during company administrations" and notes:

"The Bank of England's financial markets law committee has urged the Insolvency Service to change regulations over administrations in order to avoid uncertainy, including that of Lehman Brothers.
In a letter to Stephen Leinster, director of policy at the Insolvency Service, the FMLC urged regulators to change the present insolvency law, especially the rules relating to administration liabilities.
"It appears to the members of the FMLC that the issues of legal uncertainty … have materially affected market participants in their dealings with Lehman Brothers International (Europe) after its collapse and that this offers direct evidence of the need for these issues to be addressed," wrote Joanna Perkin, FMLC secretary.

Financial institutions, mostly hedge funds, which held $14bn of assets at Lehman, have opposed plans under which they would help pay for the long administration process. Under a proposal, the Lehman administrator, PricewaterhouseCoopers, as well as the lawyers involved and the about 500 Lehman staff , would receive some of their payment from the claimants.

"Because a significant part of the work being done … relates to the return of assets, the proposal is that an element of that cost is applied to the people who will benefit," said PWC administrator Tony Lomas. "If the people whose assets are tied up in the company do not pay for that work, the administrator would question what work he would do because the cost would fall on the unsecured creditors who derive no benefit."

Under the law, parties involved in an administration are paid from the company's assets, before the rest of the money goes to creditors. However, hedge funds argue that it would be unusual for a company to pay for the administration process out of a business's proprietary holdings, instead of its estate."

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