Administration

Introduction

Administration is a procedure available to a company that is insolvent or is likely to become so which places the company under the control of an Insolvency Practitioner (who is appointed as Administrator) and the protection of the Court with the following objectives:

  • • rescuing the company as a going concern
  • • achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in Administration

or if the Administrator thinks that neither of these objectives is reasonably practicable and no unnecessary harm is done to the interests of creditors as a whole

  • • realising property in order to make a distribution to one or more secured or preferential creditors

Administration can thus be used to help rescue a failing business by allowing a breathing space to allow the business to continue as a going concern or to enable the orderly and beneficial sale thereof. However, in practice Administrations often achieve the secondary objective of “a better realisation of assets” and the company ends up subsequently being dissolved.

An Administrator may be appointed by the Court or out of Court by the holder of a qualifying floating charge (QFC) or by the directors of the company. Joint Administrators may be appointed.

Whilst in Administration creditors are prevented from commencing or continuing with any legal actions against the company except with the leave of the Court.

Appointment

Appointment by the Court

An application to the Court can be made for an Administration Order to be made. Such an application is necessary in the following circumstances:

  • • where an unsecured creditor or creditors seek the appointment
  • • where a Supervisor of a Company Voluntary Arrangement has already been appointed
  • • where a Liquidator (or provisional Liquidator) is in office
  • • where an Administrative Receiver is in office
  • • if there is an outstanding Winding Up Petition against the company

The Administration application is a prescribed form and a witness statement must be attached thereto disclosing the company’s financial position, any security held by creditors, any outstanding insolvency proceedings and other relevant matters in order to satisfy the Court that the company is insolvent.

The written consent of the proposed Administrator must be filed with the application confirming acceptance of the appointment and his belief that the purpose of Administration will be achieved.

When the holder of a QFC is served with a copy of the Administration application they can apply to the Court to appoint the person of their choice provided that certain conditions are met.

The Administrator’s appointment is effective from the date and time of the Administration Order which will be sealed by the Court.

Appointment by a Qualifying Floating Chargeholder (QFC)

The holder of a Qualifying Floating Charge (QFC) which relates to the whole or substantially the whole of the company’s property can, in certain circumstances, appoint an Administrator by simply filing a Notice of Appointment with the relevant Court. Alternatively, the holder of a QFC proposing to make an appointment can file a Notice of Intention to Appoint an Administrator at Court which will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company until the Notice of Appointment is filed within 5 days with the Court and with the written consent of any prior QFC and of the proposed Administrator.

The Administrator’s appointment is effective from the date and time the Notice of Appointment is filed in Court which will endorse same.

Appointment by the Directors or Company

In the manner of a QFC appointing an Administrator by filing a Notice of Appointment the directors or the company can, in certain circumstances, similarly appoint an Administrator without a Court Order.

A Notice of Intention to Appoint an Administrator must be filed in Court by the directors or the company which will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company. At the same time a copy must be sent to every QFC seeking their written consent to the appointment prior to it being made. Once all QFCs have provided their written consent or have not responded after 5 days have elapsed the appointment can be made.

The Notice of Appointment must be filed in Court with the QFC consents (if any) and the consent of the proposed Administrator within 10 business days of the filing of the Notice of Intention to Appoint. After those 10 days the moratorium ceases.

The QFC may exercise their right to make their own without Court Order appointment in the interim period.

Where there is no QFC and therefore no Notice of Intention to Appoint it is necessary that the Notice of Appointment contains all the necessary information.

The Administrator’s appointment is effective from the date and time the Notice of Appointment is filed in Court which will endorse same.

Procedure

Position of Administrator

An Administrator must be a licensed Insolvency Practitioner who is appointed to manage the affairs, business and property of the company. Acting as an Officer of the Court and an agent of the company the Administrator must perform his functions with the primary objective of rescuing the company wherever possible and with the prime duty to creditors as a whole, However, where company rescue is not a reasonably practicable option then the Administrator will move to the second objective which might encompass situations where the company business or businesses are sold off as going concerns or where the company continues to trade to maximise returns from fulfilling orders that have already been placed. Where it is not reasonably practicable to achieve either of the first two objectives the Administrator’s objective will be to realise property to make a distribution to one or more secured or preferential creditors providing he acts in a way that does not unnecessarily harm the interests of unsecured creditors.

The Administrator’s powers are wide-reaching and he can do anything expedient for the management of the affairs, business and property of the company. Such powers include the power to appoint or remove directors.

The Administrator is required to issue and advertise a variety of notices for the attention of the Registrar of Companies, the Court, other statutory bodies such as HM Revenue & Customs and the members of the company and creditors generally.

The Board will be required to complete a statement of truth called a Statement of Affairs on behalf of the company.

Under a “pre-pack” agreement the sale of all or part of the company’s business and assets is negotiated with either a third party or the existing owners before a company enters Administration in order to preserve the value of the business and its assets. Given the perception by some creditors of abuse of pre-packs it is essential to ensure there is proper marketing and disclosure of the process so as to avoid a breach of insolvency legislation and/or best practice requirements. A “pre-pack" normally involves an independent appraisal of the company’s business and assets and some marketing by a qualified valuer experienced in insolvency matters.

There is a one year time limit within which the Administration must be concluded, but this period can be extended with the agreement of creditors or the leave of the Court if more time is needed to achieve the purpose. Administration can also come to an end if the Administrator believes that the purpose has been achieved or cannot be achieved.

A company in Administration can seek a Company Voluntary Arrangement (CVA) upon a proposal made by its Administrator. A CVA can run concurrently with the Administration.

Administrator's Proposals

As soon as is reasonably practical, and in any event within 8 weeks of his appointment, the Administrator must send out to all creditors and members of the company and Companies House a statement of his proposals (although the time limit can be extended by creditors or the Court). The proposals will include full details relating to the appointment and the circumstances leading up to it and set out how the Administrator intends the purpose of Administration to be achieved and how the Administration will end. A copy of the director‘ s Statement of Affairs, or a summary thereof, must be attached to the Administrator’s proposals. Included with each copy of the proposals sent to creditors normally there will be notice of a creditors’ meeting at which the unsecured creditors will be invited to vote on such proposals. A meeting will only be necessary if there is the prospect of a distribution to unsecured creditors.

Creditors' Meeting

If a creditors’ meeting is held then it must take place within 10 weeks of the date of Administration upon at least 14 days’ notice (although the time limits can be extended by creditors or the Court). The business at the meeting can be carried out by correspondence but 10% or more of creditors in value can requisition a physical meeting to be held.

The proposal can be accepted (by a majority vote in value) or modified and then accepted or rejected. If rejected then the Administrator is required to report that fact to the Court and seek directions therefrom.

If a creditors’ meeting is held then unsecured creditors will have the opportunity to appoint a Creditors’ Committee of 3 to 5 creditors to assist the Administrator and if no Committee is appointed approve the basis of the Administrator’s fees and disbursements (including any unpaid pre-administration fees and costs). If no meetings are convened then it will be for the secured or preferential creditors to approve such fees and costs in accordance with statute.

The Administrator must send a report on the outcome of the meeting to all creditors, the Court and Companies House.

The Administrator manages the company’s affairs and business in accordance with the proposals agreed with the creditors.

Conclusion

The method used to exit the Administration will depend on a number of factors and the most appropriate exit route will be confirmed by the Administrator. Common exit routes are creditors’ voluntary liquidation (CVL) or a move straight to dissolution. Where funds are available to facilitate payment of a distribution to unsecured creditors then creditors’ voluntary liquidation is common. However, where there is no prospect of any return to unsecured creditors then a move to dissolution is most likely.

The Administrator must give notification to Companies House, the Court and all creditors upon termination of the Administration in the prescribed form.

In addition, the company can also be returned to its directors and management which is uncommon unless there has been payment in full or a Company Voluntary Arrangement approved.

If a CVA has been approved during the Administration then the CVA may continue according to its terms after the Administration has been concluded.

A company can also exit via a compulsory liquidation.