Extension to administration: don’t take it for granted

A recent Scottish case considered the requirements of administrators when applying to the Court for an extension to the term of an administration.

It has become increasingly apparent that the Scottish Courts are applying significant scrutiny to administration extension applications. The opinion of Lord Braid in this case provides helpful guidance for administrators and their advisors of the Court’s expectations and requirements of administrators in such applications.

In his judgement, Lord Braid addressed three fundamental questions: (i) the information which ought to be given to creditors before an application is made to extend the period of administration, (ii) the approach taken by the Court when considering whether to grant an extension (and if so, for how long), and (iii) the date to which an extension should be granted (if at all).

Background

The application, in which Harper Macleod LLP represented the administrators, concerned the administration of PSL 2021 Realisations Limited (formerly known as Peacocks Stores Limited) (the ‘Company’) which traded as a fashion retail business with 503 stores trading across the whole of the United Kingdom, Republic of Ireland and the Channel Islands.

The Company, which previously achieved annual turnover in excess of £350million, encountered financial difficulties and administrators were appointed on 19th November 2020. The Company has one secured creditor and more than 1,000 unsecured creditors whose claims total approximately £70million.

The period of the administration of the Company had been extended on three occasions prior to this late application but with certain aspects of the administration remaining outstanding, the administrators sought a further extension to take the administration into its fifth year.

Information to be provided to creditors

Recent Scottish cases have highlighted that although there is no formal requirement in terms of the Insolvency Act and the Scottish Rules, a practice has developed in terms of which the Court expects administrators to give reasonable notice to all creditors (secured and unsecured) of their intention to seek an extension and to afford them the opportunity to object by a specified date. That notice can be provided either by a letter uploaded to the administration online portal or in the latest six-monthly progress report, provided sufficient information is available at the time the progress report is filed.

Lord Braid, in his Opinion, confirmed that notice to creditors ought to include (i) the length of the extension which is sought, and (ii) a specified date by which creditors may object to the proposed extension.

Lord Braid then addressed the approach taken by the Court when assessing whether to grant an extension and if so, for how long. The Court will make its determination by assessing: (i) the reasons why the administration has not been concluded, (ii) whether there are any other insolvency regimes which are more suitable, and (iii) whether the extension is likely to achieve the purpose of the administration. Lord Braid explained that while it was not the case that the Court had adopted a practice not to grant extensions for as long as a year, nonetheless it should not be presumed that the extension will be granted for a year. The Court must be persuaded on the merits of each individual case of the appropriate duration of extension.

Lord Braid advised both administrators and their advisors that an extension of an administration should never be applied for, or granted, as a matter of formality and that the Court must always be afforded sufficient time for applications to be considered before the administration is due to expire.

In his Opinion, Lord Braid sets out five questions the Court will consider when reviewing administration extension applications.

1. Why has the administration not yet been completed?
2. Is any alternative insolvency regime more suitable?
3. Is the extension sought likely to achieve the purpose of the administration?
4. If an extension is appropriate, for how long should it be granted?
5. Have the creditors been given adequate notice of the intention to seek an extension?

The date to which an extension should be granted

Finally, Lord Braid dealt with the question of the date to which an extension should be granted. He explained that, if say, an administration has been extended until 31st December 2024 then an extension for one year should be granted until 31st December 2025, and not to 30th December 2025 as he noted having seen in applications (which would otherwise effectively mean that one day would be lost per year).

Conclusion 

At the hearing on the matter, Lord Braid expressed his disquiet that all too often he sees applications for extension put before him which virtually mirror the prior year’s application. He made it clear, as mentioned above, that extensions shall not be given as a matter of course and that each shall be considered on its own merits. He did comment that where a number of prior extensions have been granted with little evidence of progress having been made, a shorter extension might serve to focus the minds of the administrators. It is hoped that Lord Braid’s Opinion will provide useful guidance for administrators and their advisors as to how future applications should be approached.