When is administration appropriate?
Administration is an insolvency process that protects a limited company and it’s assets from any legal process.
Where a company is coming under pressure from it’s creditors for non-payment of debts and creditors are threatening legal proceedings or a winding up petition, the company may need the protection administration brings to provide time to determine which strategy is likely to provide the best return to creditors.
Once a company is in administration, creditors are prevented from commencing or continuing with any legal process. In addition to the moratorium on legal proceedings, creditors are also unable to take possession of assets unless the creditor has permission from the administrator or the Court. The Court will only grant permission if recovery of the asset does not prejudice the interests of the creditors as a whole.
Administration is particularly useful where for example a company has arrears of rent and a landlord is threatening to forfeit the lease. Readers will have seen numerous examples of administration being used in several high profile retail insolvencies where the administration has provided time for the administrator to identify loss making units, re-negotiate rents, cut overhead and staff numbers with a view to then selling the business as a going concern.
What is administration?
Prior to the Enterprise Act being enacted in 2003, administration was a cumbersome and expensive process and was used predominantly by large companies however under the recent legislation, a company can enter administration quickly and cost effectively.
A company should enter administration only if one of the three statutory purposes of administration can be achieved. The statutory purposes are as follows:
- To rescue the company as a going concern;
- To achieve a better result for the company’s creditors than would be expected if the company was liquidated;
- To enable a payment to one or more secured or preferential creditor
A company can enter administration on the application of a director or a shareholder. If there is a secured creditor with a qualifying floating charge (contained in a debenture dated after 15 September 2003), 5 business days’ notice of the director’s intention to appoint administrators must be given. The secured creditor can then either support the director’s nomination for administrator or appoint another administrator. A company can also go into administration following a Court Order however this is generally only required if a petition to wind up the company has already been presented.
Within 8 weeks of being appointed, the administrator must write to all creditors and give the administrator’s proposals as to how the administrator intends to achieve the purpose of administration. The proposals should include a report on the events leading up to the appointment of the administrator, the purpose of administration, details of the administrator’s progress since appointment and financial information such as a receipts and payments account and an estimated outcome statement.
Administration lasts for a period of one year but can be extended either with permission of the court or with creditors’ consent. A company may exit administration by being handed back to the directors, by entering a Company Voluntary Arrangement, liquidation or by applying for dissolution.
In some circumstances, it may not be possible for an administrator to trade a company and in order to preserve the value of the company for the benefit of its creditors, an immediate sale may be preferable over liquidation.
In a pre-pack administration, a purchaser is identified prior to administration and once the company enters administration, the administrator immediately completes the sale of the business. This ensures a seamless transition of the business from one company to the purchaser.
In the pre-administration period, the Insolvency Practitioner advising the company has obligations and responsibilities to ensure that the pre-pack sale is in the best interests of the creditors and the maximum value for creditors is being achieved. There is also a pre-pack pool available being an independent body of business people, to which the purchaser can apply to obtain third party confirmation that the pre-pack sale is the best option available for all stakeholders.