Pumpkin Patch exposes holes in insolvency law

Dick Smith, bless it, went into receivership on January 4 and the following day tripped into voluntary administration. Across the ditch, it appeared to enter receivership and administration on the same day. 

Pumpkin Patch, hitting the skids after a long slide, also went into receivership and administration on the same day. This appears to be a trend, and not just because McGrath Nicol was appointed as administrator on both occasions. More about it later.

To understand this trend let’s take a step back. A receiver is appointed over a company by someone who has a general security over the entire entity, usually a bank. The debtor company borrows cash and agrees in advance that if it can’t repay the money the bank can appoint external management, a receiver, to run the business.

However, this agreement isn’t binding on other secured creditors who retain the right to remove their goods. Running a firm the size of Pumpkin Patch in receivership is going to be a struggle when everyone from the water cooler guy to those who supplied stock is rushing in to retrieve their equipment. Although this happened frequently before voluntary administration became law in 2008.

The law perhaps needs to be tidied up here. I am sure Paul Goldsmith’s insolvency working group is on to it. 

Voluntary administration was designed to allow struggling companies to seek a reprieve from secured creditors for up to six weeks to restructure their affairs. At the end of this six weeks, there should be a "watershed meeting" to agree on a compromise or proceed to liquidation.

The intention wasn’t for a patsy administrator to sit passively in his/her office, with no intention to try to salvage the company while the receiver continued to run the business and the minor secured creditors' rights were trampled on.

Given that in Dick Smith New Zealand  was in receivership when McGrath Nicol was appointed there was no genuine attempt to put together a compromise to save the company. This was simply an abuse of insolvency law of the most egregious kind.

And some people think it’s the likes of me that give insolvency practitioners a bad name!

No rights
Although voluntary administration should last six weeks it can be extended by order of the courts. However, given that the company in receivership cannot be saved there is no legitimate reason for an administration to be extended. The watershed meeting should be held and liquidators appointed. The administrators usually become liquidators.

McGrath Nicol, as administrators, sought and obtained a court extension for up to six months for Dick Smith. It is disappointing, in my view, the court allowed this. Restricting minor secured creditors’ rights in this fashion is a serious step, especially if the real nature of the administration is not to seek to salvage the company but to protect the underlying position of the primary secured creditor.

When a company is in receivership a liquidator’s primary role is to supervise the receivers and look to see if the directors have any liability for reckless trading. Curiously, in the Dick Smith insolvency McGrath Nicol received $295k from the receivers to help with the running of the administration. This was perhaps a prudent use of cash by the receivers but it is doubtful that they had any legal obligation to pay it.

If you are a director in this situation you do not want to appoint an administrator/liquidator, who will look too hard at your behaviour.

In any event here is what will happen. The administrators will prevent minor secured creditors from exercising their rights. No attempt will be made to obtain a compromise to save the company. The administrators will go to court and ask to extend the administration for up to six months, after which Pumpkin Patch will go into liquidation.

Given the past performances of insolvencies where administrations and receiverships have been run in tandem, it would be a positive step if the courts were to reject any attempt to extend this administration. 

Damien Grant is a principal at Waterstone Insolvency