When the Cupboard Is Bare: What Happens When an Administrator Finds There Is Nothing to Administer?

At the time of appointment, an administrator will ordinarily consider that there is a realistic prospect of achieving a statutory purpose of administration. Post-appointment enquiries may, however, establish that the company has no realisable assets and that none of those purposes can be achieved.

The question then is: how should the administration be brought to an end?

The statutory purpose

Under paragraph 3 of Schedule B1 to the Insolvency Act 1986 (“IA”), an administrator must perform their functions with the objective of either:

1. rescuing the company as a going concern;
2. achieving a better result for creditors as a whole than would be likely on a winding up; or
3. realising property to make a distribution to secured or preferential creditors.

Those objectives are hierarchical, with the first objective above being considered the most important. But when, upon enquiry, an administrator discovers that they are not likely to achieve any of those purposes, they need to decide what to do next.

What does the administrator need to do to end the administration?

Where the administrator thinks that the purpose of the administration cannot be achieved, paragraph 79(3)(a) of Schedule B1 requires an application to be made to the court to bring their appointment, and the administration, to an end. Where compulsory liquidation is proposed, the sequencing requirements set out below apply.

Paragraph 84 of Schedule B1 provides a separate route to dissolution where the administrator thinks that the company has no property which might permit a distribution to creditors. This is not a route into liquidation, nor can it replace the paragraph 79 application where the administrator has concluded that the statutory purpose cannot be achieved. If, however, the administrator does want to follow the paragraph 84 route, they should consider any suspended petition, potential recoveries and the need for further investigation.

Can the company move into liquidation?

As indicated above, the company in administration can move into liquidation. However, what route is taken will depend on the company’s circumstances. The two routes are the creditors’ voluntary liquidation route under paragraph 83 of Schedule B1 and the compulsory liquidation route, upon a winding-up petition under section 124 of the IA.

Under paragraph 83, the administrator must think that the total amount each secured creditor is likely to receive has been paid or set aside and that a distribution will be made to unsecured creditors, otherwise than solely by virtue of the prescribed part under section 176A. If those conditions are met, registration of the administrator’s notice ends the administration and places the company into creditors’ voluntary liquidation.

Where there are no assets and no prospect of a distribution, those conditions are not met. The administrator should therefore consider compulsory liquidation if further investigation or the pursuit of funded recoveries is required.

In such circumstances, there are three principal options:

• An existing suspended petition. Where the administrator was appointed by a qualifying floating charge holder under paragraph 14, an existing winding-up petition is suspended under paragraph 40(1)(b), rather than dismissed. When the administration ends, this petition is revived. The administrator can seek to have the paragraph 79 application and the existing petition dealt with together, without the need for a fresh petition. This distinction was considered in Harlow (Administrator of Blak Pearl Ltd) v Creative Staging Ltd [2014] EWHC 2787 (Ch). The position is different where a petition was dismissed on the making of an administration order under paragraph 40(1)(a).
• A company petition presented through the administrator.

o   Section 124(1) allows the company to present its own winding-up petition. Paragraph 60 of Schedule B1, read with paragraph 21 of Schedule 1, gives the administrator the power to present or defend a petition for the company’s winding up. The administrator can therefore cause the company to present a petition, ordinarily relying on section 122(1)(f) and supported by evidence of insolvency under section 123. The distinction is that the petition is presented in the company’s name, acting by its administrator, rather than by the administrator personally. Holding office does not, of itself, give the administrator standing under section 124, and the administrator should not bring the appointment to an end first and assume that they can then exercise the company’s power to petition as a former office-holder.

o   If the company is to present the petition, the administrator should explain the proposed exercise of that power in the evidence supporting the paragraph 79 application and consider whether directions should be sought under paragraph 63 of Schedule B1.

o   In terms of sequencing, the application and petition should be listed together or consecutively, with provision for the administration to end before the winding-up order is made.

o   Subject to the limited statutory exceptions, paragraph 42(1) prevents a winding-up order being made while the company remains in administration.

o   The petition must also comply with Part 7 of the Insolvency (England and Wales) Rules 2016 and the Insolvency Practice Direction, and the paragraph 79 application does not replace the need for a petition.

• A fresh creditor’s petition. A creditor with standing under section 124 can present a petition, ordinarily relying on the company’s inability to pay its debts under sections 122(1)(f) and 123. If the petition is to be presented or continued during the administration, the administrator’s consent or the court’s permission must be obtained under paragraph 43(6). That consent does not, however, allow a winding-up order to be made while the administration remains in place. The evidence provided in these cases should set out the enquiries undertaken following appointment, why none of the paragraph 3 objectives can be achieved, the company’s liabilities and financial position, and why compulsory liquidation is appropriate despite the absence of realisable assets. Funding for the application, petition and required deposit should also be agreed, and the Official Receiver ordinarily becomes liquidator initially on a compulsory winding-up order (the administrator does not automatically continue in office as liquidator).

What should the administrator say in their proposals?

The fact that the purpose of administration cannot be achieved does not, of itself, remove the requirement to prepare proposals.

The proposals should explain what has changed following their appointment. In particular, they should set out:

• the circumstances in which the administrator was appointed;
• the information available at the time of appointment;
• the investigations and due diligence undertaken following appointment;
• the administrator’s conclusion that there are no assets, or insufficient assets, available for realisation;
• why none of the statutory purposes in paragraph 3 of Schedule B1 can now be achieved;
• the anticipated treatment of creditors;
• the proposed route for bringing the administration to an end; and
• where relevant, the administrator’s intention to facilitate a subsequent liquidation or dissolution.

The proposals should reflect the administrator’s understanding of the position at the date they are prepared and, where there is no prospect of a distribution to unsecured creditors, the administrator should also consider whether the statutory provisions allow the usual creditor approval process to be dispensed with.

Conclusions

The absence of assets does not leave the administrator without options. The task is to identify the appropriate route out of administration and put the necessary funding and procedural arrangements in place. Importantly, administrators should be mindful that, whilst the cupboard may be bare, their exit still needs to be carefully considered and planned.