Where a company is insolvent and the directors believe that the future potential of the company is about to be harmed by the actions of a hostile creditor, often an aggressive landlord or the Crown, thought should be given to the use of a protective mechanism known as administration. This mechanism is designed to shield the company from its creditors whilst a restructuring plan can be completed.

Is administration suitable for all companies?

An administration is most appropriate for a company of reasonable size with reasonably predicable profitability and cash-flows. An insolvent company with few assets, limited prospects and poor cash-flow is more likely to be a candidate for creditors voluntary liquidation.

The purpose of administration

A company is in administration when a licensed Insolvency Practitioner (IP) is appointed as administrator to manage the affairs of the company for the benefit of its creditors.

The administrator's main aims are to:

  • Attempt to rescue the company as a going concern; or
  • Achieve a better outcome for creditors of the company than would otherwise be achieved if the company were put directly into liquidation. This might mean selling the whole or part of the business.

If these aims are not possible, then the administrator may realise the company's assets and make a distribution to one or more secured or preferential creditors.

Appointment of administrator

The IP (who has the status of an officer of the court) may be appointed either by:

  • The company (ie. its members/shareholders;
  • The directors of the company;
  • The holders of a qualifying floating charge over the company's assets; or
  • The court.

The appointment of the administrator can now be made relatively quickly if carried out by the company or directors of the company, or qualifying floating charge holders, as a court order is often not required. In certain cases a court order is required, for example where a company is already in liquidation, or has entered into a creditors voluntary arrangement. In addition, a creditor of a company must apply to court where he seeks the appointment of an administrator over that company.

Qualifying floating charge holders (usually the bank) must be given 5 day's clear notice of the intention of the company or directors to appoint an administrator. The charge holder may then choose instead to appoint its own administrator. An administrator's duty is however to act in the interests of all creditors, regardless of who appoints him.

The administrator must send a notice of his appointment to each of the company's creditors, the Registrar of companies and the company itself, and must publish notice in the Gazette and in a newspaper local to the company's place of business. Any letter or business document sent out by or on behalf of the company or administrator must show that the company is in administration and clearly state the name of the administrator and the fact that the affairs and business of the company are being managed by him. Reference to the appointment of the administrator must also be included on any website set up for the company.

Moratorium on proceedings

Immediately on commencing the procedure to enter into administration, a moratorium is placed on any insolvency or other legal proceedings against the company and any pending winding-up petitions are suspended or dismissed, as the case may be. If administrative receivers have already been appointed, they are required to vacate office. In essence, this means that no-one can "knock the company over" whilst it is in administration.

Statement of company's affairs

One or more of the company's directors will then be required to provide the administrator with a statement of the company's affairs. A prescribed form is used to detail the company's assets and liabilities.

Initial creditors meeting

Within eight weeks of his appointment, the administrator must circulate a statement to the company's creditors setting out his proposals for achieving the purpose of the administration along with an invitation to an initial creditors' meeting, assuming circumstances dictate that one is require - this is usually the case. The proposals may include, for example, a voluntary arrangement or a compromise or arrangement with creditors or members. At the initial creditors' meeting, the proposals will be voted upon and may be approved with or without modifications.

Rescue proposals

Parliament's preference is for a company's business to continue as a going concern thereby saving as many jobs as possible. A Company Voluntary Arrangement (CVA) is one of the ways for this to be achieved. A CVA is a legally binding deal with creditors, requiring in excess of 75% approval (in terms of total value of debt) from them, to repay all, or some, of the company's debts over an agreed time period from the company's future profits.

An administrator might alternatively consider the sale of whole or part of the business as a going concern. He will need to market the business for sale extensively in order to generate as much interest in it as possible. Any buyer is unlikely to have the opportunity to conduct extensive due diligence or to receive the usual warranties and representations from the vendor, in this case the administrator.

The 'pre-pack' administration route, where a buyer for the business is found before the company is placed in administration, is increasingly becoming more common. This legitimate, yet sometimes controversial method, permits the existing management team or other third party to purchase those parts of the business it knows to be viable via a 'newco', and effectively to leave behind existing liabilities in the 'oldco'. However, this procedure is fairly strictly controlled with additional regulation for administrators having been introduced on 1 January 2009.

Ending administration

Administration of the company ends when:

  • the purpose of the administration has been sufficiently achieved;
  • if the administrator thinks that the purpose of the administration cannot be achieved;
  • the administration has run for a period of 12 months or such extended period as the creditors or court have sanctioned;
  • the company is moved into creditors' voluntary liquidation; or
  • the company moves to dissolution.

JMW Solicitors

JMW Solicitors can provide advice and assistance to company directors, creditors and insolvency practitioners on a wide range of issues relating to administration.

For directors, we can advise whether administration is appropriate for the company and examine available alternatives, help with selecting an insolvency practitioner, giving guidance on the necessary steps prior to, and commencement of, administration as well as guidance on the possibility of a turnaround or sale of the business, in whole or part.

For qualifying floating charge creditors who find they have received a letter informing them of the proposed appointment of an insolvency practitioner as administrator, we can act quickly to assist with the appointment of an alternative, if appropriate. For landlords, creditors with existing security or creditors with retention of title we can provide advice and assistance with all relevant documentation.

JMW Solicitors can provide advice to insolvency practitioners acting as administrators on all aspects of insolvency law, assisting with the legal aspects of company voluntary arrangements, group re-organisations and restructurings, business and property sales, pre-packs and the investigation of prior transactions entered in to by the company or its directors.

For assistance, call us on 0345 872 6666 or complete our online enquiry form at the top of the page and we will get back to you.

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