Tag: Administration

What is administration?

Last week I wrote my ten predictions for the games industry in 2012.  One of them was that we would see more developer collapses in 2012.  Sadly, that’s already taking place, with news today that UK developer Monumental Games has gone into administration.
I thought you might find it useful to know a little about administration, which is the most frequently seen form of insolvency proceedings for businesses in the UK.  Here’s what I said when speaking with Gamesindustry.biz back in 2010:

Realtime Worlds enters administration

Realtime Worlds, the Dundee-based developer of MMO All Points Bulletin, suddenly entered administration earlier this week. 

Those of you who follow games industry developments will have known about this development since it broke (and for those who want more background or info on recent developments, have a look here on Develop or here on Edge).  If you’re interested in why it happened, Nicholas Lovell at GamesBrief has written up an interesting early analysis here.  Lastly, if you want to know about administration and what it means, have a look at my post, “What is administration?” (which featured on Gamesindustry.biz earlier this week).

As for RTW, my early thoughts from a lawyer’s perspective:

  • While the purpose of administration is to try to rescue a company in severe financial difficulties, there is a lot of stigma for a company entering administration, since there is usually a perception that something must have gone fundamentally wrong with the company or its management if it couldn’t be saved.
  • Moreover, entering administration (or any other insolvency proceedings, e.g. liquidation) usually has severe legal consequences: (1) banks will withdraw funding and exercise their security; and (2) suppliers and other parties with whom you have controls will (if their contracts are well drafted) use contractual prohibitions on either party entering insolvency as justification to terminate their contracts with the company.  In other words, once you enter administration you can bet upon your funding and your contracts being cut, immediately.  Not good.  Then everyone will make a claim for all the money they’re owed and potentially even sue the company.  That’s worse.
  • As a result, virtually every company in financial trouble will try and do anything at all that means it can be rescued without formal insolvency proceedings being started.  On that basis, I would guess that RTW has been in discussions for some time about trying to rescue itself, but clearly for whatever reason that didn’t succeed or it just wasn’t enough.
  • On the other hand, RTW clearly has some valuable assets, so it may be that the administrators can rescue the company (or at least part of it) in some way, shape or form in the near future.  It looks like there are already promising developments on that front.

No doubt we’ll hear more about this in the next few days and weeks, so I’ll update this post in due course.

Postscript: Rob Fahey at GI.biz has just written an interesting editorial on the impact of RTW’s fall could have on the UK games industry in the future.

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Zushi Games enters administration

UK publisher Zushi Games has entered administration, reports MCV.  It had previously published games including Premier Manager and Jig-a-Pix.  It’s always a shame to see a company go into administration, but it’s worth bearing in mind what administration is and what it is intended to do.  Read on for more…
What is administration?
Administration is a legal procedure which companies must enter into when they become insolvent.  ‘Insolvent’ means the company can no longer continue as a going concern and has a two-part legal test: (i) if the company cannot pay its debts as they fall due, or (ii) if the company’s assets are worth less than its liabilities.  If that test is met, and the directors conclude there is no prospect of saving the company, then they are under a legal duty at that point to trigger administration.
In practical terms, triggering administration means an insolvency professional (often a specially trained accountancy firm) takes over full control of the management of the company, with a view to either (i) trying to rescue the company as a trading business and bring it out the other side of administration whole; or (ii) if that is not possible, to sell the company and/or its assets to try to satisfy as many of the creditors as possible.
In other words, administration does not necessarily = death of the company.  The administrator is under a duty to try to achieve the best result he or she can, which means trying to keep the company afloat.  In this regard, administration is similar to the objectives of Chapter 11 bankruptcy protection in the USA (albeit the legal regimes are quite different).
All of which makes administration sound far easier than it actually is.  In reality, administration is messy, complicated and often drawn-out – as you’d expect when a business is on its deathbed.  In particular, it’s worth bearing in mind that it is not just the company or directors which can trigger administration – substantial creditors of a company can also start administration.  And, when they do, they usually want to get paid as much as possible, as quick as possible.  Then there’s the competing/conflicting demands from other creditors, plus directors, employees and shareholders.  Like I said, it gets messy and complicated.
It already sounds a little like Zushi Games’ administration could be getting complicated, with its co-founder and chairman Ian Stewart declining to comment further “until the ongoing litigation processes are complete”.  It also appears (says MCV) that there is a receivership action against one of its properties; the details on that are pretty scarce, and it could in reality be one of several different flavours of legal action, but none of them are particularly good for the company.
On the other hand, one of the increasingly popular/controversial solutions to a debt-laden but otherwise asset-rich company entering insolvency is a pre-pack administration (this is what happened with the insolvency of Oxygen Games which I wrote about previously) or a ‘fire sale’ administration, either of which involves a quick sale of the business/valuable assets to a single buyer who takes over the whole shindig (rather than breaking the company to sell up piecemeal to several buyers).  We’ll have to see whether anyone puts in an offer like that for Zushi.  Otherwise, unfortunately it could well be looking at a long, drawn-out process before this is over…
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CDV enters insolvency, could be bought up?

German console and PC publisher CDV Software Entertainment AG has filed for insolvency at the district court in Frankfurt, reports Gamesindustry.biz.

CDV’s insolvency comes soon after its victory over Southpeak in a long-running UK legal battle by CDV against Southpeak and its subsidiaries over alleged breaches of contract and copyright infringement, which saw Southpeak being ordered to pay substantial damages to CDV.

As Gamesindustry reports, Southpeak has had its own share of financial troubles recently, with publisher Paradox suing it for around $585k which it claimed Southpeak was unable to pay as it had become insolvent.  In the event, Southpeak settled with Paradox a month or so after.  (A standard strategy when a company owes you money but is in poor financial condition is that you sue them for repayment in the hope that they will settle quickly with you, meaning they keep the business running a while longer and you get more money from the settlement than you would do if the company went into insolvency.  This strategy faces legal issues,but it can work – as it did for Paradox).

No doubt further information will emerge as more details of CDV’s entry into insolvency, in particular the court paperwork, emerge.  In particular, how long before someone makes an offer to buy up its assets?

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Stargate studio goes bankrupt, or What is Chapter 11?

Gamesindustry.biz reports that US developer Cheyenne Mountain Entertainment has filed for Chapter 11 bankruptcy protection.  The developer group is known chiefly for its Stargate licence (it has already made Stargate Resistance and is apparently continuing work on the forthcoming MMO Stargate Worlds).
This news itself comes from a statement made on CME’s Stargate forum, which is here.  Contrary to what Gamesindustry says, it is not actually clear from the statement whether CME has entered Chapter 11, or just its subsidiary Firesky, the actual developer of Stargate Resistance (if it turns out just Firesky is in Chapter 11, we’ll update this post).  Leaving that to one side, the statement is a useful summary explaining what Chapter 11 bankruptcy protection actually is and why a company would need it:
“Cheyenne Mountain’s corporate structure has undergone some dramatic changes in the last few weeks, and that has resulted in various actions such as the filing for Chapter 11.
“Certain parties believed that was the right thing to do, other parties do not and this is still being evaluated and may be rescinded. Even if the bankruptcy should go through, however, Chapter 11 simply allows a company to restructure its debt to a manageable plan approved by the courts. It does not absolve a company of debt, and it does not shut it down or otherwise affect its daily operations. 
“This will all be sorted out in the legal and proper manner, and all of us on the development side of things hope it’s done as quickly as possible. That said, our entire staff is in-house working on upgrades and expansions for Stargate Resistance, and we continue to be motivated and excited by the response we’ve received from our customers.”
So:
  • ‘Chapter 11’ is a form of bankruptcy protection for the company
  • In other words, it permits the company to restructure its debts while still ‘trading through’ its financial difficulties.
  • Chapter 11 does not of itself kill off a company, nor does mean it can renege on its debts or other liabilities.  The whole point of Chapter 11 is that it is a measure of last resort to enable a company to survive tough circumstances (although a company may come out the other side looking very different)
  • That said, if a company cannot survive even in Chapter 11, then sometimes it may need to enter more serve insolvency proceedings
The closest UK insolvency procedure to Chapter 11 is called administration (more info at Wikipedia, with the usual Wikipedia caveat), another statutory scheme intended to help a company in financial difficulties to trade through its problems and come out the other side.  Example: last year UK developer Oxygen Games went into administration.
As always, happy to discuss furth if anyone is so foolish as to want more information, do let us know…
In the meantime, here’s hoping Cheyenne can indeed trade through and keep up work on Stargate Worlds (they’d probably get my subscription if they did, plus plenty of folks too I imagine…)
Post-script: Cheyenne Mountain Entertainment to sue its former Chairman
CME has also decided to sue its former Chairman & CEO, Gary Whiting, according to a statement on its web site:
“Mr. Whiting and Garvick [a company controlled by Whiting] purchased various securities from the Company and its subsidiaries and has failed to honor the terms of these purchases and has failed to pay the payments when due; therefore, the Company and its subsidiaries have foreclosed on the collateral securing Mr. Whiting’s and Garvick’s obligations including all shares and units owned by Garvick and Garrick Enterprises, LLC.

The shareholders and board of the Company have removed Mr. Whiting as a board member and as an officer and terminated his employment with the Company and any of its subsidiaries. The Company has joined the litigation against Mr. Whiting for alleged wrongdoing.“

Oh dear.  So the allegation seems to be that Whiting used his position to purchase company assets either personally or through his company Garvick, or in somehow made Cheyenne responsible for his/Garvick’s liabilities, which somehow Cheyenne has now found out about.  This of course raises the question as to why Whiting would have been removing company assets, which hopefully the litigation will explain in due course.
One final point: the press statement also says “It is uncertain at this time what the affect of Mr. Whiting’s actions and the pending litigation will have on the Company’s operations and financial condition.”  But the press statement we talked about about said “the company” was going to enter Chapter 11.  So is Cheyenne in Chapter 11 or not?

Commentary: Oxygen Games in administration

Just a quick one: Oxygen Games, a UK publisher of predominantly sports titles, last week controversially entered administration – specifically, a pre-pack administration.  The full story is at Gamesindustry.biz (articles here).  Now creditors are beginning to ask questions about exactly what is going on.  The latter article carries a quote from our own Jas Purewal (reproduced below):

” ‘Pre-packs can be very [divise]. The commercial logic is sound. But there’s this idea that pre-packs are seen as a done deal that leave creditors out in the cold,” Jas Purewal, an associate of legal firm Olswang told GamesIndustry.biz.”In circumstances where it wasn’t for the pre-pack [the company] would be broken up then pre-packs are becoming more and more common.’

‘It’s worth noting that pre-packs are also under increasing amounts of scrutiny as well because there can be situations where a pre-pack is done in controversial circumstances and creditors may be willing to fund legal challenges against it.’ “