Administration

Administration is an insolvency process by which an insolvent company is placed under control of an Insolvency Practitioner acting as Administrator to enable him to achieve objectives laid down by statute.

The first objective of any administration is to rescue the company (as opposed to the business that the company carries on) so that it can continue trading as a going concern. If the rescue of the company is impossible, the Administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation. If the Administrator cannot achieve a better result for the creditors as a whole then the purpose of the administration is to realise the company’s property to make a distribution to the company’s secured or preferential creditors.

To assist an Administrator in implementing these statutory objectives, a moratorium is provided by which creditors and others are prohibited from taking or pursuing legal proceedings against the company while it is in administration. Hence the company can benefit from a breathing space providing legal protection while a restructuring plan to rescue a company is implemented or a beneficial sale takes place commonly as a sale of the business and assets as a going concern.

There are two ways which a company can go into administration: by a Court Order made at a formal hearing or by certain parties lodging a series of prescribed documents at Court (the “out of court route”).

• An application for a Court Order can be made by one or more creditors of the company, the company itself, its directors, a Liquidator or a Supervisor of a CVA.
• A company can be put into administration by filing at Court a notice of appointment and certain specified supporting documents. This procedure may be commenced by either the company or its directors, or a party (often a bank or other commercial lender) which has a floating charge that meets the requirements (known as a qualifying floating charge holder (QFCH).

A company cannot go into administration unless it is insolvent, or likely to become insolvent, but this requirement does not apply if the administration is commenced by a QFCH.

An interim moratorium , to protect the company from the actions of creditors, will apply before the administration starts from the time an application is made to the Court for an Administration Order, or, if the out of Court route is used, from the time a notice of intention to appoint an Administrator is filed in Court.

An Administrator is an agent of the company to which he is appointed and an Officer of the Court. On appointment an Administrator must take all the company’s property into his custody or control.

An Administrator has wide-reaching powers and can do anything “necessary or expedient for the management of the affairs, business and property of the company”.

The Administrator can, as the company’s agent, cause the company to contract with third parties. Sums due under such contracts are paid in priority to the administrator’s fees and expenses, and distributions to floating charge holders and unsecured creditors.

An Administrator has a duty to perform his functions:

• As quickly and efficiently as is reasonably practicable.
• With regard to the interests of the creditors as a whole.

In some cases, the administration of a company leads to the sale of a company’s assets often as a part of a sale of the company’s business on a going concern basis. Where the sale of the company is agreed before the company goes into administration, and is then completed immediately after the start of the administration, this is known as a pre-pack sale. Such prepack sales are heavily regulated and usually require the business and assets to be openly marketed. Transparency is essential as a prepack sale must be in the best interests of creditors and so the decision making process must be evidence. Statements of Insolvency Practice 16 governs a pre-pack sale.

A normal administration differs from a prepack in that the marketing for the sale of the business and assets commences after the Administrator is appointed.

An Administrator must report and send out proposals to creditors within 8 weeks of his appointment outlining the steps taken to date and the strategy to be taken as to how the purposes of the administration will be achieved. If his proposals are approved then the Administrator should manage the company’s affairs in accordance with such proposals. The basis of the Administrator’s remuneration will normally be included in his proposals.

An Administrator has power to pay secured and preferential creditors but not unsecured creditors without Court approval.

Progress reports must be submitted to creditors every 6 months.

Creditors may form a Committee of 3 to 5 creditors to assist the Administrator in performing his duties.

An administration automatically ends at the end of the calendar year unless the creditors or the Court agree to an extension. Companies can often remain in administration for over a year and in some complex cases can last for several years through Court orders.

If the administration leads to the rescue of the company as a going concern, the Administrator hands control of the company back to the directors. More commonly, the proceeds of the company’s business and assets after costs and expenses are distributed to the company’s creditors, either by the Administrator or if there are funds to a pay a dividend to unsecured creditors by a subsequently appointed Liquidator (who may be the same person as the Administrator, if the proposals so allow). Therefore, depending on the circumstances, the administration can end either by the company moving into creditors’ voluntary liquidation or by the company being dissolved.

An Administrator can propose a Company Voluntary Arrangement (CVA) as a procedure to rescue the company which if approved via a requisite majority of creditors would restore the company to its directors with distributions being paid to creditors periodically through a Supervisor of the CVA who may be the former Administrator.

A Limited Liability Partnership (LLP) may go into administration upon the petition to the Court by the members of the partnership, creditors of the partnership or a PVA Supervisor.

Further information about administration can be obtained from the website of the Association of Business Recovery Professionals at www.r3.org.uk.