Why Companies are placed into Administration

Administration

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:

  1. holders of qualifying floating charges or
  2. a company or its directors.

The court route is only available to:

  1. creditors and
  2. 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. If the bank holds an older debenture it can appoint an administrative receiver.

In order for a qualifying floating charge holder (“QFCH”) to appoint an Administrator, it must first give the holders of any senior qualifying floating charges at least two business days’ notice of its intention to do so. If there are one or more senior charges over the assets of the company, the QFCH must file a notice of intention to appoint Administrators to the company together with an administration fee at the High Court.

As soon as the court seals the notice of intention, the company has the protection of an interim moratorium. This prevents the creditors of the company from bringing legal action against the company and therefore its assets. The interim moratorium lasts until the appointment of an Administrator to the company.

The QFCH must then file a notice of appointment of Administrator(s) along with a number of other documents to the court. The appointment is effective from the date and time stated on the notice of appointment.

It must be noted however, that an Administrator has a duty to act in the interests of all creditors and not just on behalf of the QFCHs.

Appointment by company/directors

In order for the company/directors to appoint an Administrator, they too must file certain documentation at court.

No Administration order will be granted unless the QFCHs have been given five days’ clear notice of the company’s or the directors’ intention to appoint an Administrator. The QFCHs will retain the ability to step in and appoint their own choice of administrator should they so decide.

In addition, there are a number of instances where a company or its directors cannot appoint an Administrator. These involve the company being subject to ongoing insolvency proceedings.

The Court Route

The court route is used by unsecured creditors, as they cannot use the out of court appointment process, or, where the out of court route is prohibited due to a company being subject to ongoing insolvency proceedings. QFCHs, companies and directors usually use the ‘out of court route’ as it is generally cheaper and more flexible due to it not being governed by the court’s deadlines.

Once the relevant documents have been filed with the court, the court will fix a time and date for the hearing of the application. In the meantime, the company gains the benefit of an interim moratorium from the time the court issues the application

A sealed copy of the application will then need to be served on the relevant people (as listed in the Insolvency Act 1986) at least five days before the date of the hearing. The applicant must then file an affidavit at court confirming service at least one day before the hearing.

At the hearing, the court will make an order as it thinks appropriate, including an order winding up the company. A court will only make an Administration order in relation to a company if is satisfied that (a) that the company is or is likely to become unable to pay its debts, and (b) that the Administration order is reasonably likely to achieve the purpose of Administration.