The Chancellor has announced (notably without using the n-word) that Northern Rock is to be nationalised.

What does this mean?

• The shares pass into public ownership
• The government has at last called the bluff of the hedge fund shareholders
• Ron Sandler becomes Executive Chairman
• Focus should now be brought to restructuring the business to create - in several months' time - something saleable

Although the company should now be able to concentrate on turning itself around, the government - as the new owner - should steer clear of micromanagement. Mr Sandler and his team should be left to manage the business, and the government should concentrate on the politics (and the arguments with shareholders about compensation).

At least the risk of formal insolvency has receded almost entirely - it's just not necessary with the Treasury as both senior lender and shareholder. The balance sheet has been restructured through a form of debt-for-equity deal. One could also describe nationalisation in this case as a form of administration or receivership but without the stigma of insolvency and with only shareholders being crammed down. Indeed, had the government not guaranteed all the depositors, Northern Rock would have been in a similar position to other companies with administration being the mechanism used to restructure the balance sheet.

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We mention in a previous post and, briefly, in comments (here) the decision in the Trident Fashions case, Exeter City Council v Bairstow & Ors [2007] EWHC 400 (Ch) (02 March 2007), that the administrators were found liable to pay rates as an administration expense. The decision applies to administration cases generally and, in addition to causing consternation with its retrospective effect, it has significantly increased the cost of administration where there are substantial property assets.

The impact can sometimes be mitigated by applying to the court under para 79(1), Schedule B1, Insolvency Act 1986, for an order that the administrators be discharged with effect from the passing of a resolution to put the company into creditors' voluntary liquidation. Such was the decision in Re TM Kingdom Limited, as reported here by Theo Anderton and in the Law Society of Scotland's Journal here by Alistair Burrow. Sylvia Yendall notes here that it was also held in Re OM Recoveries Limited that an administrator may apply to court under para 79(1) when he considers it necessary or desirable.

Advantages of liquidation in thses circumstances are that unoccupied property rates are not a liquidation expense and a liquidator is able to disclaim onerous property.

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