Companies are usually placed into Administration because they are struggling to pay their debts as they fall due and facing serious threats from creditors. When a company goes into Administration, it is protected by a moratorium so that no legal proceedings can be brought against the company. The rationale for this is to protect the company from its creditors while a debt restructuring plan is devised and/or the company’s affairs are re-organised to provide creditors with the best possible outcome. The law surrounding Administration was amended with the introduction of the Enterprise Act 2002 (“EA”) so that the key purpose of Administration is to aid recovery of companies, where possible, as opposed to winding them up.
What is Administration
Administration is the process by which a person, is appointed under the Insolvency Act 1986 (as amended by the EA) to manage a company’s affairs, business and property. A person can only be appointed the role of administrator by:
- an administration order by the court;
- the holder of a qualifying floating charge (this is most likely to be a bank); or
- by the company or its directors.
Role and Duties of Administrator
Regardless of how an Administrator is appointed, they are an officer of the court. They also act as an agent of the company, hence they are authorised, amongst other things, to enter into contracts on behalf of the company and so can fully take over the day-to-day management of the business. The Administrator’s main purpose is to rescue the company as a going concern, or achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up. Only when either of these objectives is unachievable, can the Administrator sell property in order to make a distribution to secured or preferential creditors. Within eight weeks of the company entering Administration, the Administrator must present a statement to the creditors setting out proposals for achieving the purpose of Administration or explaining why they cannot be achieved. The creditors will then vote on which proposal they prefer.
The appointment of an Administrator lasts for one year, although this may be extended with the consent of creditors or the court.
Methods of going into Administration
A company may enter Administration after a formal court application and hearing (the ‘court route’) or upon filing certain documents at court (the ‘out of court route’).
The out of court route is only available for:
- holders of qualifying floating charges or
- a company or its directors.
The court route is only available to:
- creditors and
- a company or its directors.
The Out of Court Route
Appointment by a qualifying floating charge holder
Banks can appoint an administrator if they hold a qualifying floating charge under a debenture granted after 15 September 2003.
For more information on:
- Appointment by company/directors
- The Court Route