Comet Administration highlights ‘Inequity of Legal Arms’

LEXLAW Principal, M Ali Akram, was interviewed by Joel Hills live on Sky News Business providing insolvency law commentary around the collapse of Comet Group Limited.

Joint Administrators (Neville Barry Kahn, Nicholas Guy Edwards and Christopher James Farrington all of Deloitte) published a Statement of Proposals 17 December 2012 on which we comment below.

Comet Group (In Administration) – Is the likely liquidation outcome fair or an inequitable burden on the State?

The administrators’ proposals suggest that the financial position is as follows:

  1. Total assets are around £62.2 million
  2. The cost of the administration will be around £10.4 million
  3. There are preferred creditors of £1.5 million, representing holiday pay accrued by the employees prior to the date of the administration.
  4. The ‘prescribed part’ is £0.6 million – this is money which is reserved by statute to the unsecured creditors in preference to the floating charge holders.
  5. That leaves £49.7 million for the secured (fixed and floating charge) creditors, which is only about a third of their outstanding debt.

Therefore only the prescribed part of £600,000 will be available to the unsecured creditors.  As the unsecured creditors’ debts total around £233 million, the distribution will be less than a penny in the pound (approximately 0.4p per £).  The secured creditors as a class will get about 34p in the pound (85 times more than the class of unsecured creditors), although the actual payment will depend on the nature of the security.

We understand that the unsecured creditors include:  HMRC, employees (by virtue of their redundancy claims), trade creditors and customers who have paid for but not received goods.  It seems unlikely that many customers will bother to claim in the administration.  The employees are entitled to payment out of the National Insurance Fund.  There is a pension deficit of some £30 million, which will be met by the Pension Protection Fund, which is funded by a levy on pension schemes generally.  In 2003, the commencement of the Enterprise Act 2002 meant that HMRC were no longer afforded ‘preferential creditor status’ and any unpaid taxes fell to be dealt with in the same was way as all other unsecured debts.

This case illustrates the problems caused by the ubiquity of the use of ‘all assets’ floating charges (by legally and financially sophisticated financial institutions) which result in minimal funds being available to unsecured creditors and a large burden being placed on the taxpayer.

Authors: M Ali Akram (Principal)