When a company is insolvent and facing serious threats from creditors it may enter into administration. Licensed insolvency practitioners are appointed by either the company, the directors, or by a direct application to the court. During this process, the company is protected from creditor action.
What is Administration?
Administration is a process available to insolvent companies to provide protection from its creditors. It involves a licensed insolvency practitioner (IP) being appointed to take control of the company and look into its financial situation. Administration gives the IP breathing space to formulate a plan outlining how to restructure or sell the business and assets. Protection from creditors is particularly useful and necessary in a situation whereby a company is being proactively or aggressively pursued debt repayment by one or more of its creditors. A common reason for a company to enter Administration is if creditors are threatening or have issued a winding-up petition. Otherwise, creditors may be pursuing the company through the courts. Administration is not the same as administrative receivership.
Once placed into Administration, then under paragraph 3 (1) of Schedule B1 of the Insolvency Act 1986, the Administrator of a company must carry out their duties.
This is with the objective of:
- Rescuing the company as a going concern.
- Achieving a better result for the company creditors as a whole. Better, in some cases, if the company were wound up, without first being in Administration.
- Or realising property to make a distribution to one or more secured or preferential creditors.
Any legal action taken against a debtor company in Administration has to be approved by the court. So the process provides a valuable measure of legal protection.
There are various ways for the appointing of an administrator:
- By court order application by the company directors.
- By court order application by a majority of shareholders (50% or more).
- By court order application by one or more of the company’s creditors.
- An administrator can also be appointed without a court order. At the request of a majority of shareholders (50% or more), the directors (with shareholder approval) or any creditor who holds a qualifying security (known as a QFC appointment).
Any creditor with a qualifying security can overrule any direct appointment of an administrator chosen by shareholders or directors. In layman’s terms, this means the secured creditor’s choice of Administrator overturns the directors or shareholders choice.
The powers given to administrators when a company enters administration are wide-ranging. They effectively supersede those of any existing company controllers. The powers of the directors cease and an administrator has the power to appoint or remove directors. One of the administrator’s duties is to send out proposals for creditor approval. The proposals detail the purpose of the Administration and a plan of action for what the Administrator hopes to achieve. For both the creditors and the company.
An administration can come to a conclusion for the following reasons:
- There is a one-year time limit within which the administration must conclude. There is some scope for this time-frame to increase with permission of the court or agreement of the creditors.
- If the purpose of administration has been achieved, the administrator can bring an end to the administration in two ways.
- If appointed by court order, the administrator must apply for another court order for the administration to end.
- If appointed out of court, the administrator can just end the administration without court approval.
- If achieving the purpose of administration is in doubt by the administrator, the administration can only end by making an application to court. This is irrespective of administrator appointment.
Once an administration concludes, there are three options available. These depend on what the purpose of the administration is:
- The company can return to the control of its management team and directors.
- The company can enter liquidation.
- A company can be dissolved if there are no funds available to pay back any remaining unsecured creditors.
What are the advantages of administration?
Administration is a highly useful procedure for company directors. Working with insolvency practitioners it can ensure the survival of a business.
Some of the particular benefits of the process are:
- Entering Administration brings a halt to any legal proceedings brought against a company.
- The prevention of further decline of the financial position of a company. This not only gives protection for the core business but reduces the risk of directors opening themselves up to a potential wrongful trading action.
- Administrators must be licensed insolvency practitioners and as such are heavily regulated. Their conduct and any actions taken by them are dictated by a strict code of conduct.
- The administrator is duty-bound to work for the benefit of all creditors (including unsecured).
- The restructuring of the company is an option. The administrator has the opportunity to dispose of non-profitable parts of the business and sell the valuable parts of the company. Therefore, the business may continue trading and maintain employment for the employees. On occasion, it is necessary for jobs to be made redundant, to ensure the commercial viability of the company.
- Where the company cannot afford to pay employees redundancy payments, claims can be submitted to the national insurance fund. This is a government fund managed by the redundancy payments service.
- If current directors do not want to continue with the responsibility, there is the option of the appointment of new directors. This is unusual but the administrators will handle and manage this.
What are the disadvantages of administration?
- Entering administration means directors have to relinquish control of their company. They may face redundancy through the sale of the business to a 3rd party.
- The selling off of company assets to third parties.
- After instigating, administration is a process that becomes publicly available information. Most notably, the informing of creditors and any correspondence including the company website, emails and purchase orders must state the company is in administration.
- During the life of administration, the raising of all purchase orders must go through the approval of the Administrator.
- There must be an advertisement of the appointment of an administrator in the London Gazette and local/national newspaper. The company advertises administration so creditors, not listed in the statement of affairs, become aware of the administration. They can submit proof of debt to the administrator in the event there is a monetary return to creditors.
- Any creditor holding a qualifying floating charge (often a factoring company or bank) can appoint an administrator of their choosing. Directors may have a preference for which insolvency practitioners they would like to appoint. However, the charge holder may not feel comfortable with this choice so they have the power to appoint one of their choosing.
- The costs associated with administration can be high and escalate very quickly if trading the company.
- All the business and assets may be sold to the current owners/directors or a 3rd party. In this case, the current employees may transfer to another entity under TUPE (Transfer of Undertaking) laws. This can cause problems especially if the company needs to cut employment costs to ensure future survival.
- When a company enters administration, suppliers are unlikely to provide new credit terms revoking existing lines of credit. It can be challenging to trade and operate as normal due to cash flow restraints. For the company to succeed, there must be sufficient monetary resources or an introduction of funding during the administration.
How long does the Administration process last?
The administration process continues for up to one year. However, it can take far less time depending on the particular circumstances in a given situation. There is scope for the process to last longer. This requires the consent of the courts and/or the creditors involved. It is the administrator’s responsibility to conclude the administration as quickly as is reasonably possible. The administrator has an eight-week limit to draft proposals. The proposals are effectively a plan of action. The Administrator needs to distribute proposals to creditors and seek creditor approval. The granting of an extension of the eight-week time-frame comes from court and/or creditors.
The proposal is a very detailed document. The content of which is set out in rule 2-33 of the Insolvency Rules 1986.
The proposal will include:
- Details of the administrator’s appointment.
- The reasons behind their appointment.
- The purpose of the administration.
- The expectation of the anticipated time-frame for the administration to run its course.
- Statement of affairs.
The appointment of an administrator
Out of court appointments and application by court order.
Each of the following parties can apply for an administration:
- Shareholders and directors of the company.
- Qualifying floating charge holders are typically a bank or another of the company’s secured lenders.
- A creditor the company owes money to. This creditor has endeavoured to collect the debt by other methods but has not had success.
The Enterprise Act of 15th September 2003
This allows for:
- The appointment of an administrator out of court
- The appointment of an administrator by the court
Out of court appointment of an administrator
In certain circumstances, the appointment of an administrator can be out of court, without a court hearing. Due to certain criteria, this appointment can be made within a few hours of the company’s initial instruction. Out of court appointments can only be made under certain circumstances and by company directors or shareholders.
The Enterprise Act of 2003 brought changes to the administration process. Subject to certain conditions, directors and shareholders of a company can ensure their company is under the protection of an administrator. This happens much more quickly and inexpensively than was previously the case. The appointment of an administrator by these parties can now happen without a court hearing. Directors have a duty of care to be responsible. They should look at entering administration as soon as they are aware of significant financial problems.
There are, however, certain criteria that must apply to the company in question.
The insolvency practitioner, when instructed by the company, must determine:
- If the company is insolvent.
- Whether or not an Administration procedure is appropriate, the purpose and likely achievement.
The out of court appointment of an administrator is not allowed if the following conditions have arisen:
- The issuing of a winding-up petition against the company.
- The company is already in liquidation.
- There is already an application for an administration order that is yet to conclude. For example, a creditor’s application for an administration order.
- There is already an Administrative Receiver in place.
- The company is subject to a company voluntary arrangement (CVA) or failed administration within the preceding 12 months.
- An insolvency practitioner is unable to achieve any of the purposes outlined in paragraph 3 (1) of Schedule B1 of the Insolvency Act 1986
Occasionally, these points correlate to a company looking at administration. In this case, directors and shareholders can only apply for an administrator appointment by the courts.
If directors or shareholders of a company act early enough, before the company is subject to point 1-5 above, an appointment of an Administrator can happen out of Court. If necessary, it is possible that an Administrator appointment can occur very quickly.
The company bank (if the bank holds a qualifying floating charge)
In administration, a company’s bank is considered to be unsecure unless a debenture has been registered with Companies House. Debentures can also be referred to as “fixed and floating charges”.
Where banks have registered a debenture, they can appoint administrators or administrative receivers without the need for a court application. An administrative receiver can only be appointed where the bank’s change was registered before 15th September 2003.