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 they think it is not reasonably practicable, or that (b) would achieve a better result for creditors as a whole. They may only pursue (c) if they think neither (a) nor (b) is reasonably practicable, and they must 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 one or more secured or preferential 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
Where a notice of intention to appoint an Administrator must be given, filing it at court starts a short interim moratorium. It lasts until the Administrator is appointed, or until the time allowed for the appointment runs out. The full moratorium starts when the Company enters administration. During the interim moratorium, execution creditors cannot recover assets and legal process cannot be continued against the Company without the permission of the Court. Once an Administrator is appointed, the Administrator’s consent or the Court’s permission is needed.
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 brings a Moratorium, which protects the Company’s assets from most creditor action while the Administrator pursues the purpose of the administration. A sale of the business is one possible outcome, not a certain one.
- The shareholders may have opposing views to certain directors, but a governance dispute between them is not on its own a lawful route into Administration. Administration is only available where the Company is, or is likely to become, unable to pay its debts, and where it will pursue one of Administration’s statutory purposes. A qualifying floating charge holder with an enforceable charge can appoint without meeting that debt test.
- A pre-pack administration sale of the business can let it carry on trading without a break and help preserve the Company’s goodwill. The outcome is not guaranteed. The sale depends on the administrator’s judgement of what serves creditors, the position of any qualifying floating charge holder and, where the buyer is connected to the company, the 2021 rules on sales to connected persons.
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.
Administration is not the only statutory route to breathing space. Since the Corporate Insolvency and Governance Act 2020, an eligible company can obtain a standalone moratorium under Part A1 of the Insolvency Act 1986. It protects the company from most creditor action for an initial 20 business days, which can be extended, while the directors stay in control and a licensed insolvency practitioner acts as monitor. The monitor must consider it likely that the moratorium will result in the rescue of the company as a going concern. The same Act introduced the restructuring plan under Part 26A of the Companies Act 2006: a compromise with creditors, sanctioned by the court, that can bind a class of creditors who voted against it if strict conditions are met. Neither suits every company, but where the business itself can be saved, either may fit better than administration.
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. If there is a qualifying floating charge holder, or anyone who is or may be entitled to appoint an administrative receiver, the company or directors must give them at least five business days’ notice and file a notice of intention to appoint at court. If nobody is entitled to notice, they appoint directly by filing a notice of appointment with the required statutory declaration.
Filing the notice of intention triggers an interim moratorium. The company or directors must then make the appointment within 10 business days of that filing. If they do not, the interim moratorium ends.
During the initial five business days, a qualifying floating charge holder has the right to appoint an Administrator of its own choosing, or to consent to the shareholders’ and directors’ choice of Administrator.
Qualifying Floating Charge holder
Alternatively, the QFC can appoint an Administrator itself, out of court, once its floating charge is enforceable. Whether this requires a formal demand against the Company first depends on the terms of the charge, so a formal demand should not be treated as a universal requirement.
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]
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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), the Administrator will seek the creditors’ decision on the proposals, by deemed consent or a decision procedure. Creditors get at least 14 days’ notice of the decision date. The initial decision date must fall within 10 weeks of the company entering administration, unless that period is extended.
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, the Administrator must report that to the Court. The Court may then end the Administration, adjourn the hearing, or make any other order it thinks appropriate.
If the Administrator thinks that every creditor will be paid in full, that unsecured creditors will receive nothing beyond the Prescribed Part, or that neither rescue nor a better result than liquidation can be achieved, the Administrator need not seek a decision from creditors, and the Proposals may be deemed approved. Creditors holding at least 10% of the total debts can still require a decision if they ask in the prescribed way and time.[/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.
If the Administrator thinks there is no property left that would allow a distribution to creditors, they send a notice to that effect to the registrar of companies at Companies House, under paragraph 84 of Schedule B1 to the Insolvency Act 1986 — not a court application. The company is then automatically dissolved three months after that notice is registered.
Creditors’ Voluntary Liquidation
Where secured creditors have been paid or provided for, and there are funds for unsecured creditors beyond the Prescribed Part, the Administrator may move the Company into a Creditors Voluntary Liquidation to pay that distribution. Alternatively, the Administrator may ask the Court for permission to pay it in the Administration.
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 must ask the Court to end the Administration if the Administrator thinks its purpose cannot be achieved or that the Company should not have entered administration, or if the creditors decide the Administrator must apply. The Court can then end the Administration, and the Company can be wound up by the Court instead. Where potential misfeasance claims or antecedent transactions need further investigation, moving to a compulsory liquidation also hands that investigation to 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, capped at £800 per employee, for accrued holiday pay, which is not subject to that cap, and for certain unpaid occupational and state pension scheme contributions. Six weeks is a different limit belonging to a different scheme: it is the maximum holiday pay the Redundancy Payments Service will pay out of the National Insurance Fund, and it has nothing to do with where a claim ranks in the estate.
If you are dismissed while the company is in administration, you do not need to wait for a liquidation. 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. Liquidation usually results in redundancies. A court winding-up order ends employees’ employment on the date of the order, and anyone the liquidator keeps on to help the winding up works under a new contract from that date. In a voluntary liquidation employees are not automatically dismissed, though most are made redundant once trading stops, and staff may transfer if part of the business is sold.