Administration is a rescue and realisation procedure for companies that are, or are likely to become, unable to pay their debts. There is no minimum company size. It is used more often by larger companies because it is expensive to run and needs funding from day one, but that is a commercial constraint, not a legal eligibility rule.
Read on to Learn More about this useful business rescue process.
The Administrator’s Function
An administrator must perform their functions with the objective of achieving one of the three statutory purposes in Schedule B1 to the Insolvency Act 1986. They are a hierarchy, not a free choice: the administrator must pursue (a) unless it is not reasonably practicable, and may only pursue (c) if neither (a) nor (b) is reasonably practicable and it does not unnecessarily harm the interests of creditors as a whole.
a. To rescue the Company as a going concern;
b. To achieve a better result for creditors as a whole than in a liquidation scenario;
c. To realise the Company’s property in order to make a distribution to its preferential and secured creditors.
What Happens When a Company Goes into Administration?
Going into administration means the running of the business passes to an administrator, who must be a licensed insolvency practitioner. The appointment does not have to be made by a court.
There are three routes under Schedule B1 to the Insolvency Act 1986: by the court on an administration application, out of court by the company or its directors, and out of court by the holder of a qualifying floating charge. In practice most administrations are out-of-court appointments.
It is not the case that every secured creditor must consent before an administration can go ahead. What the legislation gives is a notice right to the holder of a qualifying floating charge. Other secured creditors have the rights their security gives them, but no general veto.
Where the company or its directors propose to appoint an administrator out of court, they must give at least five business days’ written notice of intention to appoint to any qualifying floating charge holder. That holder can then consent, or appoint an administrator of its own choosing instead. Whether and when notice is required depends on the security in question, so take advice on the specific facts.
Moratorium
A moratorium will be created once a Notice of Intention to appoint an Administrator has been filed in Court. This prevents assets from being recovered by execution creditors or any legal process being continued against the Company, without the permission of the Administrator or Court.
Why Should a Company Go into Administration?
Here are the reasons why a company might go into Administration:
- A QFC or Qualifying Floating Charge holder, might appoint an Administrator if the company has breached the terms of its covenant or loan agreement.
- The directors may have concerns over the potential enforcement by execution creditors over company assets which could jeopardise trading. An Administration initiated by Directors will ensure that a Moratorium will protect the Company assets until the business can be sold.
- The shareholders may have opposing views to certain directors and with no alternative to settle the dispute, might consider appointing an Administrator.
- A Pre-Pack Administration sale of the business will ensure that there is a seamless transaction ensuring that the continuity of the business can be protected whilst at the same time preserving the Company’s goodwill.
Can You Stop your Company From Going Into Administration?
If your company is being pressured into Administration, your best change of an alternative outcome will be achieved by early action. If you act earlier enough, it may be possible to aim towards a ‘pre-pack’ instead, which means the current directors could form a new company from the old one, or persuade a third-party to buy some of the assets of the old company and continue operating.
Once an administrator has been appointed, the directors cannot simply reverse the appointment. That is not the same as saying nothing can change. An administration ends only through the statutory routes, but it can end early in defined circumstances, including on the administrator’s application to court, on a creditor’s application challenging the appointment or the conduct of the administration, or automatically at the end of its term if it is not extended. Preventing Administration altogether via an understanding of the early warning signs of insolvency is the best advice. In all cases, taking advice as soon as possible will give you the best range of options.
What is the Process?
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Application to appoint an Administrator can either be an Out of Court Application or a Court Application:-
i) Out of Court Application
The company or its directors
The out-of-court appointment can be made by the company or by its directors. It is not a right belonging to an individual shareholder: the company route requires a shareholders’ resolution, and the directors’ route a decision of the board. A notice of intention to appoint is then filed at court.
The filing of the Notice will trigger a moratorium and allow a grace period of 10 days in which the Directors’ will need to formally appoint an Administrator.
During the initial 5 day period, a QFC will also have a right to appoint their own Administrator or alternatively consent to the Shareholders’ and Directors’ choice of Administrator.
Qualifying Floating Charge holder
Alternatively, the QFC can also apply to appoint an Administrator via an Out of Court process, if they have made a formal demand against the Company and it remains unsatisfied.
Should there be a prior QFC registered at Companies House, then notice is served on the prior QFC in the event that they wish to appoint their own Administrator.
ii) Court Application for an Administration Order
Depending on the given set of circumstances, an Out of Court appointment might not be possible and therefore an Administration Order will be sought at a Court hearing.
The following parties can appoint an Administrator through the Court:-
- The Directors’ might apply for the appointment of an Administrator should a winding up petition have been served against the company.
- A QFC might apply in the circumstances whereby the Company is already in liquidation.
- The company itself may apply, which in practice requires a shareholders’ resolution. Note that “just and equitable” grounds belong to the winding-up jurisdiction, not to administration: an administration application is decided on the statutory conditions in Schedule B1, principally that the company is or is likely to become unable to pay its debts and that administration is reasonably likely to achieve its purpose.
- Creditors may apply for an application for the appointment of an Administrator on the grounds that the Company cannot pay its debts as they fall due.
- The Liquidator of the Company can apply for the Company to enter into Administration.
- The Supervisor of a CVA might be required to fail a CVA and exit into an Administration.[/expand]
[expand title=”Stage 2 – Sale of the Business” tag=”h3″]
The Administrator will appoint professional qualified agents to prepare valuation reports based on going concern and break-up values of the business and make recommendations on the method of disposal of the business.
Armed with the valuation, the Administrator might consider a Pre-Pack Sale is put in place prior to the Administration but executed on or shortly after appointment.
If the conditions are appropriate, a Pre-Pack can be advantageous as the business can be sold without negative publicity, which could destroy the value of the business and lead to loss of customers and staff. It can also be used where there is a lack of funds available to keep the business trading whilst the Administrator looks for potential buyers.
However, the lack of transparency of the Pre-Pack has opened the process up to criticism. This lack of transparency is perceived as particularly acute where the purchaser has a significant prior connection to the Company.
A “Pre-Pack Pool” The safeguards around connected-party sales have since changed. Under the Administration (Restrictions on Disposal etc. to Connected Persons) Regulations 2021, an administrator cannot make a substantial disposal of the company’s business or assets to a connected person within the first eight weeks of the administration without either the approval of creditors or a qualifying report from an independent evaluator. The voluntary Pre-Pack Pool that preceded this regime no longer plays that role. Administrators must also report to creditors on a pre-pack in line with Statement of Insolvency Practice 16.[/expand]
[expand title=”Stage 3 – The Administrator’s Proposal” tag=”h3″]
Once appointed, the Administrator will deal with the formalities of appointment by notifying all creditors of the insolvency as soon as reasonably practicable.
If this is a “Pre-Pack” sale of the business, the Administrator will need to circulate a more detailed report to creditors in accordance with Statement of Insolvency Practice 16 (SIP 16).
The Administrator will have a period of 8 weeks in which to issue a Proposal to the Company’s creditors which sets out the strategy of the Administration.
The Proposal will include how the Administrator intends to deal with the assets of the Company; explain the purpose of the Administration; provide a Director’s Statement of Affairs; provide Creditors with an estimated outcome statement and deal with the exit strategy of the Administration.
Should the Administrator be of the opinion that unsecured creditors will receive a dividend, (in addition to that from the Prescribed Part Fund), they will be given the opportunity to vote to either approve or reject the proposals within 14 days of their circulation.
Providing the Proposal is accepted the Administrator will be able to continue the role and function in order to fulfil the objectives of the Administration.
However, should the Proposal be rejected, then the Administrator will need to consider to refer the matter to the Court.
If in the Administrator’s opinion there will only be a distribution to one or more secured creditor and/or preferential creditors, or only a dividend to the unsecured creditors from the Prescribed Part Fund, then the Proposals may be deemed approved.[/expand]
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The Administrator will conduct the affairs of the Company in line with the agreed Proposal and will report to creditors on a six monthly basis giving an update on the progress of the case.
The Administration can last for a period of a year, however it can be extended for longer, with the consent of creditors or the Court.
Following a sale of the business or realisation of assets, the Administrator will declare a dividend and pay any QFC or preferential creditor in part or in full.
If funds permit, the Administrator may also declare a dividend to unsecured creditors in relation to any claims under their Prescribed Part. However, the Administrator is unable to make a dividend to unsecured creditors in excess of this Prescribed Part without an order of the Court. In practice, it will be paid following the exit of the Administration by placing the company into liquidation.[/expand]
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The Administration can come to an end in a number of ways:-
Company Returned to its Directors
If, for example, the company’s creditors can be repaid in full (including the cost of the Administration), possibly through the sale of part of the business or further shareholder investment, the company now being solvent can be returned its directors.
The Administrator may apply for the Company to be dissolved. If there are no assets left in the estate having already made distributions to either the QFC, preferential creditors or unsecured creditors (from the Prescribed Part Fund), or from surplus funds with the Court’s consent. The Administrator will file a notice of dissolution at Companies House.
Creditors’ Voluntary Liquidation
If there are funds available for unsecured creditors (excluding the Prescribed Part) which require distributing, then the Administrator will move the Company into a Creditors Voluntary Liquidation to allow this distribution to be paid.
The Administrator’s Proposal may have provided for a mechanism to allow the Company to exit into a CVA provided the proposal is approved by at least 75% by value of the creditors who vote, subject to the safeguard concerning connected creditors.
The Administrator can petition the Court for the winding up of the Company on the basis that there are potential misfeasance claims and antecedent transactions that require further investigation by the Official Receiver.[/expand]
What Does Going into Administration Mean for Employees?
Administration very often means redundancies for employees, since the administrator is tasked with giving creditors the best return. In practice this often – though not always – means trimming down the company structure, and this could mean job losses.
The first 14 days matter, but not for the reason often given. The 14-day period is about whether the administrator is treated as having adopted employment contracts. An administrator has 14 days from appointment in which anything they do is not taken as adoption. If employment continues beyond that and the contract is adopted, certain liabilities arising under the adopted contract after adoption, principally wages and pension contributions for the period of continued employment, are payable ahead of the administrator’s own remuneration and expenses.
This is a question of priority for sums earned during the administration. It is not a rule that employees dismissed in the first 14 days become ordinary creditors while those kept on become preferential. Employees have preferential status for certain pre-appointment arrears whenever they are dismissed, and claims for notice pay and redundancy are generally unsecured. How an individual employee is treated depends on what is owed, when it arose and what happens to their employment, so take advice on your own position.
Employees have preferential status for unpaid wages and salary for the four months before the insolvency, currently capped at £800 per employee, and for accrued holiday pay, which is not subject to that cap. Plus up to six weeks of holiday pay, and certain pension accruements.
If the company exits the administration into a liquidation procedure, you may be able to claim statutory redundancy pay, notice pay, arrears of wages and holiday pay from the Redundancy Payments Service, within the statutory limits.
With all these matters, you are recommended to consult the insolvency practitioner overseeing the administration for advice.
What is the Difference Between Going into Administration and Liquidation?
While both process are intended to bring about the best return for corporate creditors, administration is what is termed a ‘business rescue’ process in that the company continues trading rather than being closed down.
Administration involves restructuring and a clear exit strategy, through which the company or its business can be released from the process. It tends to suit companies with a business worth preserving and the funding to support the procedure, which in practice often means larger companies, but there is no size threshold in the legislation.
Liquidation, on the other hand, means the end of the limited company, the sale of its assets to repay creditors, and its eventual striking off the register at Companies House. All employees will be made redundant.