UK: Further clarity on exit from new-style administration

Two recent cases have confirmed that for companies in "new- style" (i.e. post-15 September 2003) administration, if the administrators make distributions to creditors in the course of the administration, and no assets remain which permit further distributions, the company should be moved from administration directly to dissolution, and there is no need for an intervening liquidation.

Two recent cases, Re GHE Realisations Limited (Companies Court, 4 November 2005) and Re Preston & Duckworth Ltd (in liquidation) (High Court, 7 October 2005) have recently given guidance on the provisions on exit from a "new-style" administration. Schedule B1 to the Insolvency Act 1986 (as amended by the Enterprise Act 2002) sets out a variety of ways in which a company can leave administration, but their interpretation has proved problematic.

One of the exit routes provided for is set out at paragraph 84 of the Schedule, which reads "If the administrator of a company thinks that the company has no property which might permit a distribution to its creditors, he shall send a notice to that effect to the registrar of companies … On the registration of [such a notice by the registrar of companies] the appointment of an administrator of the company shall cease to have effect [and] at the end of the period of three months [from the date of registration of the notice] the company is deemed to be dissolved".

It was widely considered that this exit route would be used as a complement to the administrators’ powers to make distributions to secured and preferential creditors, and to apply to Court for permission to distribute to the company’s unsecured creditors, under paragraph 65 of the Schedule. Once the distributions were complete, it was thought that the company could be dissolved, thereby avoiding the need for an intervening liquidation. However, in his decision in Re Ballast Plc (2004 EWHC 2356), Blackburne J disapproved this view, holding instead that the exit route was only available where the company had never had any assets which might have permitted a distribution to creditors.

In the cases mentioned above, this decision was overruled. Indeed, in the GHE Realisations case, Rimer J decided that in cases where distributions had been made by the administrators, and no further assets remained, it was mandatory for the administrators to take steps to move the company straight to dissolution, unless there were special circumstances which made it desirable that the company should go into liquidation (one example is that a wrongful trading action against the directors may only be brought by a liquidator). Therefore, where distributions have been made in the administration, and no assets remain, it will now be the norm for a company to exit directly to dissolution under paragraph 84 of the Schedule.

One final point relates to administrators who were appointed by the Court under paragraph 12 of the Schedule. Such administrators will not be released from liability for their acts in the course of the administration, until such time as is set by the Court (paragraph 98(2)(c) of the Schedule). In these cases, even if a notice if filed under paragraph 84, an application to Court will also be necessary to set a time for the administrators’ release. However, if the administrators are to apply to Court for permissions to make distributions to unsecured creditors, it may be possible to have the issue dealt with at this stage.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 22/11/2005.