Listening to the news or reading the newspapers it is hard to avoid the conclusion that administration has become the insolvency process of choice for many businesses facing financial difficulties. Since the 'rescue culture' promoted by the changes introduced by the Enterprise Act 2002, the number of receiverships has declined and administrations have increased. The aims of administration are very different to those of liquidation and receivership, as the process does not assume a distribution of assets to creditors and tries to ensure the interests of creditors as a whole are considered.

More and more businesses will be coming up against the issue of dealing with companies in administration and this article will provide an outline of the administration to give an understanding of the process.

Aims Of Administration

Administration is a procedure available under the Insolvency Act 1986 which allows a company's affairs to be reorganised or its assets realised under the protection of a moratorium preventing its creditors pursuing their debts.

The Insolvency Act sets out the purpose of administration as being:

  • rescuing the company as a going concern (the primary objective);
  • achieving a better result for the company's creditors as whole than would be likely if the company were wound up (the second objective); or
  • realising property in order to make a distribution to one or more secured or preferential creditors (the third objective).

The objectives are stated in the order in which the administrator should pursue them, only pursuing the second objective if he or she considers it is not reasonably practicable to pursue the primary objective or if the second objective would achieve a better result for creditors as a whole. Likewise the third objective is only pursued if it is not practicable to achieve either of the first two objectives.

If the aims of the proposed administration do not fall within the objectives then a court will refuse to grant an administration order as there may be another more appropriate procedure such as liquidation. Although it is not necessary to identify in advance which of the objectives will be achieved, the administrator will only accept the appointment where he feels it is possible for him to achieve one of those three objectives.

How is an Administrator appointed?

There are two routes into administration. Firstly by application to the court for the appointment of an administrator or secondly by the company or its directors filing a notice of intention to appoint the administrator at court.

A court appointment is made if the court is satisfied the company is, or likely to be, unable to pay its debts and the administration order is reasonably likely to achieve the purpose of the administration. An application for a court order may be made by the company, its directors, one or more creditors, a liquidator and certain supervisory authorities, such as the FSA. A creditor can only use court procedure for appointment of an administrator.

The out of court route into administration is available only to the company or its directors, and the holders of qualifying floating charges. It cannot be used if the company is subject to a petition for winding-up or if a receiver has been appointed.

In the out of court procedure the company or its directors must give 5 business days' notice to anyone who is or may be entitled to appoint a receiver and to the holders of qualifying charges seeking their written consent to the appointment. This allows any floating charge holder a period of 5 days in which to appoint their own receiver (if they are entitled to do so) or to nominate their own choice of administrator.

The moratorium and creditors rights

One of the most significant aspects of administration is that from the time at which the notice of intention to appoint an administrator is filed at court or an application is made for a court appointed administrator, a moratorium takes effect for the period of the administration, initially 12 months.

Whilst the company is in administration

  • no resolution can be passed to wind up the company;
  • no steps can be taken to enforce security over the company's property without the consent of the administrator or the permission of the court;
  • no step may be taken to repossess goods in the company's possession under hire purchase agreements without the consent of the administrator or the permission of the court;
  • a landlord may not forfeit a lease and try to take possession of the property without the consent of the administrator or the permission of the court;
  • no legal proceedings, diligence, execution for debt or other process may be instituted or continued against the company or the property of the company except with the consent of the administrator or the permission of the court.

This moratorium is considered to be one of the greatest advantages of the administration process as it gives the company in administration a period of relief from being pursued by creditors. The effect is that creditors are not allowed to take any action against the company and this allows an administrator to proceed with trying to ensure the continuation of the business free from constraints of dealing with creditors trying to enforce their rights. For creditors this can be frustrating. The court is unlikely to grant permission to enforce a creditor's claim, such as to sell assets under a security or to terminate a lease, where this would frustrate the purpose of the administration by, for example, putting the company out of business premises from which it is operating.

However, a contract that includes a right to terminate the contract if the company goes into administration, may still be terminated in accordance with that provision. If the company has important supply contracts which may be terminated upon administration an administrator may need to negotiate terms upon which the supplier will continue to deal with the company in order to secure the ongoing viability of the business. Those suppliers need to ensure they agree payment terms with the administrator as their debts will not automatically enjoy any preference over other creditors just because they have contracted with the administrator on behalf of the company.

The administrator has the power to sell assets which are subject to a security, but the consideration received is treated as allocated to the security holder. The priority of creditors in an administration is similar to a liquidation with the expenses of administration ranking first before preferred and then secured creditors; secured creditors ranking amongst themselves according to the priority of their charges. However, unlike liquidation, a part of the assets available for distribution (known as the 'prescribed part') is set aside for unsecured creditors. This is 50% of the first £10,000 of net assets plus 20% of everything over £10,000, but subject to a maximum of £600,000.

The Administrator's powers and duties

The administrator has wide powers to carry on the company's business and realise its assets as specified in the Insolvency Act 1986. The administrator is an officer of the court and of the company, and carries out his functions in the interests of all creditors. He acts as the company's agent and is not therefore personally liable for contracts made as the agent of the company whilst acting as the administrator.

Contracts entered with the company during the administration period continue to be obligations of the company itself. Accordingly, anyone contracting with a company in administration may seek to ensure that terms of payment do not leave them as a creditor vulnerable to the insolvency of the company. Payment in advance or on delivery of goods may be required, or some other surety for payment or performance under the contract.

Similarly to a liquidator, an administrator has power to set side transactions which are at an undervalue and preferences which have been granted. He may also treat certain floating charges granted without proper consideration as invalid.

Unlike a liquidator, an administrator does not have the power to decide not to adopt company contracts, nor does he have the same power as a liquidator to seek a court order against a director for contribution to the company's assets as a result of wrongful or fraudulent trading. Upon appointment an administrator will review recent transactions to decide if any are vulnerable under these provisions. After his appointment, the administrator has a period of eight weeks to put to creditors at a meeting his proposals for achieving the purpose of the administration.

The proposals are filed with the Registrar of Companies. The administrator must conduct the administration in accordance with the proposals agreed by creditors.

Employees of a company in Administration

Administrators have the power to dismiss the employees but as their main function is to carry on the business they will normally retain some of the employees in the business.

Although the administrator is not personally liable for contractual liabilities of the company, if he "adopts" an employment contract certain 'qualifying liabilities' under the contract then fall to be paid in priority to the administrator's own fees and expenses, and repayments of any debts.

Qualifying liabilities are restricted to wages and salary including holiday pay, sick pay, payments in lieu of holidays and contributions to pension schemes. It is possible for these liabilities to mount up considerably and, ranking ahead of certain other charges, to run the risk of eliminating available assets for payment of the administrator and creditors.

If the business is sold the Transfer of Undertakings (Protection of Employment) Regulations ('TUPE') normally apply to the transfer and the purchaser will be deemed to employ the employees on the same terms as their current employment. Changes made to TUPE in 2006 have made it easier in some cases to change the terms of employment following a sale, and a certain amount of accrued wages and holiday pay will be met by the National Insurance Fund, to relieve purchasers of certain liabilities.

Ending Administration

The administrator's appointment automatically ends after a 12 month period but this can be extended by court order for a period determined by the court. The administrator is to try to achieve the purpose of the administration as quickly and efficiently as possible but the administrator can apply to court to end the administration and must do so if it becomes apparent that the purpose of the administration cannot be achieved. The administrator may also apply to have the company put into creditors' winding up where he considers that secured creditors will be paid in full and distribution will be made to unsecured creditors. If the administrator considers that the company has no property remaining to distribute to creditors he may send a notice to the Registrar of Companies to terminate his appointment, which will result in the company being dissolved.

'Pre Pack' Administrations

A practice has developed in some cases of selling the business immediately following the appointment of the administrator to a purchaser who has agreed the terms of purchase with the proposed administration prior to his appointment. This is known as a 'pre packaged' administration. The purchaser is often a vehicle owned by some of the former directors or owners of the company in administration. The sale proceeds before the administrator has put his proposals to creditors.

An administrator who conducts a pre pack administration sale must ensure his actions are not open to challenge after the sale. The sale may leave certain creditors out in the cold with no prospect of recovery, such as the landlord of property not required in the ongoing business. The administrator must have regard to the position of all creditors. The Insolvency Service issued guidelines in January 2009 to insolvency practitioners who act as administrators requiring more transparency in the process, ensuring creditors get more information about the arrangements the administrator had in place prior to his appointment and the information he had as regards the value of the business.

In some situations a quick sale will be best for all creditors as it will maximise sale value before there is a loss of confidence in the business. However, the practice is controversial and has been much criticised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.