Administration is a formal legal process in which a Licensed Insolvency Practitioner, such as Alan Coleman or James Fish are appointed to act as the Administrator of an insolvent company to take control from the directors and aid the prospects of survival. More commonly Administrators are appointed by the Board but can be appointed by secured/unsecured creditors.
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The administration brings about a full moratorium, protecting the company from legal actions of creditors, both ongoing and in the future.
All outstanding debt due to creditors is frozen at the date of administration, with the return to creditors wholly dependent upon the outcome of the administration. This relieves the pressure on the company and enables the administrators to explore ways to effect a turnaround and/or achieve their purpose.
Administrators Powers and Duties
Upon the appointment of Administrators the Directors powers of management cease, with all day to day business decisions and payments being controlled by the administrators. If the administrators decide to continue to trade the company, the directors can be retained as employees. Whether the company continues trading, is shut down or the business and assets are sold as a going concern, the directors retain their fiduciary duties and responsibilities and have an obligation to co-operate fully with the Administrator.
The Administrator is an officer of the Court and has a duty to all creditors and therefore must act with integrity and objectivity when performing his duties, which include collecting in all assets, maximising realisations and reporting the work undertaken.
The Administrator has the power to make distributions to secured and preferential creditors, together with distributing a prescribed part of the company’s net property to unsecured creditors.
The Administrator must set out his proposals to creditors as to how he intends to achieve his purpose, agree the fees of the administrators and the intended method of exiting the administration, which would be dependent upon the expected outcome to creditors.
In addition to reporting to creditors on the progress of the administration, the administrator has a duty to carry out an investigation into the reasons for failure and submit a report to the Department of Business, Department for Business, Energy and Industrial Strategy (BEIS) on the conduct of the Directors who held office in the 3 years prior to Administration.
How is an Administrator appointed?
There are three ways that a company can enter into Administration: –
Para22 – by the Directors
Following advice from a Licensed Insolvency Practitioner Alan Coleman or James Fish, the Directors can be assisted in placing the company into Administration. However, this entry route is not available to the directors if the company has received a winding up petition.
The Directors must hold a board meeting to resolve to appoint administrators and confirm that they are able to do so. They would then file a notice of intention to appoint administrators in court, which would provide the company with a period of Moratorium of 10 business days.
The notice of intention would then be served on any qualifying floating charge holder, who then has 5 business days to either consent to the appointment or appoint their own choice of administrators.
After consent is received, or 5 business days have expired (consent therefore assumed), the directors can lodge a Notice of Appointment of administrators in Court, at which point the Administrators are appointed and the Company is in Administration.
Again, this document will include a statement from the proposed administrator that they consent to the appointment and that a statutory purpose can be achieved. Additionally, the administrator will disclose any prior relationship that they have had with the company in question (if any) and, if there is to be more than one administrator, provide a statement that they will have joint powers in the Administration.
Note: if there is no qualifying floating charge holder the directors can proceed to filing the Notice of Appointment without having previously filed Notice of Intention.
Para14 – by the holder of a Qualifying Floating Charge (“QFCH”)
A bank/lender, possibly following the outcome of an IBR may seek to recover their indebtedness by appointing Administrators to take control of a company.
In this regard, the holder of a valid and enforceable charge would file a notice of intention to appoint administrators in court, which would provide the company with a period of Moratorium of 5 business days.
The notice of intention would then be served on any prior ranking charge holder, who then has 2 business days to either consent to the appointment or appoint their own choice of administrators.
After consent is received, or 2 business days have expired (consent therefore assumed), the QFCH can lodge a Notice of Appointment of administrators in Court, at which point the Administrators are appointed and the Company is in Administration. This document will include a statement from the proposed administrator that they consent to the appointment and that a statutory purpose can be achieved. Additionally, the administrator will disclose any prior relationship that they have had with the company in question (if any) and, if there is to be more than one administrator, provide a statement that they will have joint powers in the Administration.
Note: if there is no prior ranking charge holder the QFCH can proceed to filing the Notice of Appointment without having previously filed Notice of Intention.
Para12 – by an application to Court
This is usually done by unsecured creditors or shareholders, or by the directors in response to the company having received a winding up petition.
The Court must be satisfied that the company is insolvent and that a statutory purpose of Administration can be achieved (see below).
The proposed Administrator must consent to being appointed and provide an independent report supporting the Administration strategy and explaining the purpose to be pursued.
What is the purpose of an Administration?
The administrator is an officer of the Court and must perform his duties with the aim of achieving one of three purposes, as set out in Schedule B1 to The Insolvency Act 1986. The purpose must be pursued in order of priority, as follows: –
- a) Rescue the Company as a going concern
This will usually be done by securing investment into the Company, sufficient to pay all creditors, at which point the Administrator can hand back the control of the Company to the Directors and cease to act.
b) Achieve a better result for creditors as a whole than what would be the case if the Company were wound up
If it is not possible to rescue the company as a going concern, the administrator must pursue the objective of achieving a better result for creditors that would be the case if the company were placed into liquidation.
Achieving this objective is usually the result of the Administrators having sold the business and assets as a going concern, either following a period of trading the company as administrators or negotiating the sale prior to their formal appointment as administrators in a Pre-Packaged sale scenario.
The purchaser of the business as a going concern is a separate limited entity, who continues to trade the business, leaving behind the liabilities. These stay with the company in administration.
In a going concern scenario, the administrators can realise going concern values for the company’s assets as the agreed sale price will reflect their value to an ongoing business. In addition, this will avoid the costs of having to collect the assets from their present locations and subsequent disposal costs, therefore maximising the return to creditors.
Any sale of the business and assets as a going concern would only be concluded following a full and transparent period of marketing the business to ensure that all potential interest is explored and the best price is achieved, therefore maximising the return to creditors.
As Administration is considered a rescuing tool rather than a terminal insolvency procedure such as a winding up/liquidation, the provisions of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) apply. This means that the employees transfer to the purchaser in a going concern sale, reducing the liabilities within the administration (wages, holidays, redundancy claims, etc.) and again maximising the return to creditors.
- c) Make a distribution to one or more secured or preferential creditors
If the Administrators are unable to achieve either objectives (a) or (b) then they must ensure that they are capable of making a distribution to either the secured or preferential creditors.
Conclusion of Administration
The administrators term of office lasts for 12 months, however, if the administration has not been fully concluded, this can be extended by a further 12 months by the consent of creditors, or for a further period upon application to the Court.
Company Voluntary Arrangement (“CVA”)
The Administrator can propose a CVA to creditors, with the aim of them agreeing to a compromise on their debts over an agreed period of time (e.g. 50p/£ over the next 12 months), to enable the company to be rescued as a going concern. If approved, the Administration can be brought to an end and the Company returned to the Directors, albeit subject to the terms of a CVA. The former administrators would then act in their capacity as Supervisors of the arrangement to ensure that the agreement between the company and its creditors is enforced.
Creditors Voluntary Liquidation
If, after repaying the secured and preferential creditors in full, there are surplus funds available to unsecured creditors then the company can exit Administration via Creditors Voluntary Liquidation in order for the funds to be distributed by a Liquidator.
If there are no realisations available for creditors, yet there are matters that require further investigation, it is possible to apply to court to petition for the winding up of the company, resulting in a Compulsory Liquidation.
If there are no funds available to unsecured creditors then the company will likely exit via dissolution, at which point the company will be removed from the register at companies house and dissolved 3 months after the administrator has ceased to act.
Remember – only Licensed Insolvency Practitioners can assist you with formal insolvency appointments (this is a legal requirement) and are best placed to provide insolvency/debt advice. Licensed Insolvency Practitioners are highly regulated and have professional indemnity insurance. Unfortunately, there are a number of unregulated “debt advisors” advertising on the web that demand payment for their costs and then have to refer you to a Licensed Insolvency Practitioner for any formal insolvency who may also require payment and you could effectively end up paying twice unnecessarily. In our experience many debt advisors provide poor or wrong advice and in some cases encourage Directors to break the law.
RPG Business Recovery is part of Royce Peeling Green Limited (a firm of Chartered Accountants) and was established over 100 years ago (established in 1911). RPG have offices in Manchester, London and North Wales. All Insolvency Practitioners at RPG Business Recovery are authorised and licensed by The Institute of Chartered Accountants in England and Wales.
At RPG Business Recovery we highly recommend that Directors should always take advice as early as possible as this gives us the greater chance of being able to save your business and avoid a business closure. Please feel free to contact us for a FREE no obligation advice meeting or if you prefer you are welcome to contact our Licensed Insolvency Practitioners directly. Our Insolvency Practitioners are Alan and James. You are welcome to contact either Alan (Mobile 07580 885750 or email firstname.lastname@example.org) or James (Mobile 07717 001087 or email email@example.com) directly.