What is Administration designed to do?
The purpose of Administration is first off to save the entire company, and if that’s not possible then save as much of the business that’s within the company, preventing an inevitable closure should the company instead go in liquidation.
The Administrator must therefore first off look to save / rescue the company as a whole. If this is not possible (as it isn’t most of the time) he can pursue a lesser objective, typically this is trying to achieve a better outcome for creditors generally than would be the case in a liquidation.
So what does the Administrator do?
The Administrator:
- Takes over responsibility of managing the company and its business;
- Prepares a document called a Proposal, setting out the purpose of the administration and how he intends to achieve that purpose.
That Proposal is sent to creditors for their comments / approval.
Unlike an Administrative Receiver, the Administrator is required to act in the interests of creditors generally (the Administrative Receiver’s prime duties lie in looking after the interests of the chargeholder). This is because the Administrator is an ‘officer of the court’, so must therefore be fair with the creditors.
The Insolvency Act requires the Administrator to perform his duties as quickly and efficiently as possible – it’s designed to be a sort term process, under a year’s duration.
The Statutory Purpose of administration
The purposes of administration can be found in paragraph 3(1) of Schedule B1 to the Insolvency Act. They come in a hierarchy:
- The first Purpose is ‘rescuing the company as a going concern’ ie the company as a whole.
- It 1 is not possible because of the prevalent circumstances, the administrator must then look to the second purpose of ‘achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)’.
- The third statutory purpose of ‘realising property in order to make a distribution to one or more secured or preferential creditors’ can only be pursued if the first two purposes above cannot be achieved and this, the third purpose, does not unnecessarily harm the interests of the creditors of the company as a whole.
Putting in place a CVA or s895 CA 2006 Scheme of Arrangement are not in themselves statutory purposes of administration, but are instead tools by which the administrator can achieve the three statutory purposes.
The third purpose is often used by administrators appointed by the holder of a ‘qualifying floating charge’ – a floating charge over the whole or substantially the whole of the company’s assets, the charge holder is typically the company’s bank or its main funder- where there is no chance a return to unsecured creditors. (But the administrator must nevertheless act in the interests of the company’s creditors as a whole).
Who may appoint an administrator?
- Without a court order by
- Qualifying floating charge holders (QFCH) under para 14 Schedule B1
- The directors (under para 22 but subject to para 25 Schedule B1 – see below)
- The companyNote that an administrator cannot be appointed out of court by the directors or the company where:
– There’s a pre-existing winding up petition
– An administrative receiver is already acting
– The company is in compulsory liquidation or has a provisional liquidator in place.
- With a court order on the application of:
- The company
- The directors
- Creditors who do not hold a floating charge
- A Magistrates’ Court for the enforcement of a fine
- One or more creditors of the company
- The supervisor of a CVA
- A liquidator where the company is in voluntary or compulsory liquidation
- A qualifying floating charge holder where the company is in compulsory liquidation
- The Financial Services Authority (FSA) under the Financial Services and Markets Act 2000
The court cannot make an administration order where an administrative receiver is in office unless the:
- The debenture holder consents, or
- The making of the administration order renders a charge voidable as a transaction at an undervalue, preference or invalid floating charge.
Administration v administrative receivership
- Getting appointed:
- An administrator can, in theory, be appointed by simply filing the relevant documentation with the court. This can be done outside of court hours by fax or email. However, the consequences of getting the appointment wrong are so harsh that IPs tend to use lawyers to put the appointment in place, and this adds a level of costs. Therefore although, in theory, administration should be an inexpensive, quick and speedy process to start off, in practice, it isn’t and the subsequent reporting requirements are very onerous, and thus it’s a very costly process.
- An administrative receiver can be appointed whether or not a company is in liquidation, therefore the chargeholder can take control of the realisation process for their own benefit after a creditors voluntary or compulsory liquidation has already been put in place.
- An administrative receiver can be appointed where an administration moratorium has been obtained in the previous 12 months.
- Administrations are recognised under the EC Regulations while administrative receiverships are not, making it easier for the IP to deal with assets located in other EU jurisdictions, without the need to get an overseas courts to force co-operation.
- Where there are several floating charge holders it may be easier for the holder of the uppermost charge to appoint an administrator rather than for all the charge holders to agree on a single administrative receiver.
- Administrators have the benefit of a ‘moratorium; but an administrative receiver does not. This can provide a useful breathing space to enable the administrator to reach agreement for the continuation of certain key supplies.
- Administrators and administrative receivers have the same powers to trade, manage and sell the business as a going concern – there’s no difference!
- Administrators do not ordinarily ask the charge holder(s) for an indemnity, administrative receivers sometimes ask their appointor for an indemnity, this can be open ended.
- There are more, and more flexible, exit routes out of administration compared to administrative receivership. However administration only lasts for 12 months (the default period by statute, but it can be extended), whereas there is no statutory time limit as to how long an administrative receivership lasts.
- Administrators are officers of the court, therefore owe duties to the court and to creditors generally (this is still the case even though he might have been appointed out of court eg by a qualifying charge holder). Administrative receivers however have as their prime duty to realise the charged assets so as to repay the chargeholder and the preferential creditors.
- The Administrator owes a duty of care to unsecured creditors and guarantors, an administrative receiver does not.
- It is easier for unsecured creditors to remove an administrator than administrative receiver eg. If creditors reject the administrator’s proposals, they can ask the court to appoint another administrator.
- A creditor entitled to appoint an administrative receiver can ‘veto’ the appointment of an administrator, appoint their own choice.
- The administrative receiver will agree his proposed strategy privately with his debenture holder(s), but in an administration the administrator’s Proposals are approved by the creditors publicly, the chargeholders have far less control.
- The administrative receiver is not constrained by the statutory purposes administrators must pursue. The administrative receiver can simply sell the assets and then liquidate what’s left.
- In an administrative receivership, corporation tax on a capital gain is normally an unsecured claim in debt in the eventual liquidation, but in an administration, it is an expense, payable before any payout to to creditors. This effects the returns to several classes of creditor.
- A moratorium can be put in place in an administration but not in an administrative receivership.
- Other issues to think about:
– An administrator can appoint additional and/or remove existing directors from office, and administrative receiver cannot.
– An administrator can upset certain antecedent transactions eg preferences, an administrative receiver cannot.
– An administrator can take an action for wrongful and fraudulent trading, an administrative receiver cannot.
– Administrations are an expensive process, far more expensive that CVA and administrative receivership
– Business rates and rent are an expense of the administration, they might be unsecured claims in administrative receivership.
What does the administrator do during an administration?
- Manage every aspect of the company’s affairs, in line with the agreed Proposals
- Carry out any direction from the court
- Submit a report to the government on the conduct of directors
- Publicise his appointment (unlike CVA, it’s a visible appointment)
- Request a Statement of Affairs
- Set out his Proposals for achieving the purpose of administration
- Pay distributions to secured and preferential creditors. He can also pay a distribution out of the prescribed part to ordinary creditors without court approval, and with court approval to unsecured creditors other than out of the prescribed part.
- Dispose of floating charge assets without having to ask for the chargeholder’s or court’s approval. The charge holder then has the same priority in respect of the ‘acquired’ property as over the property disposed of.
- As regards assets subject to a fixed charge, the administrator can, where the disposal is necessary to help achieve the purpose of the administration, apply to the court for an order authorising him to dispose of the asset. In this case, the charge holder must be compensated appropriately, for a sum set by the court.
- The administrator can also apply to the court for an order authorising the disposal of assets covered by any HP, conditional sale, chattel leasing or retention of title agreement.
- Challenge transactions at undervalue (s238 Insolvency Act 1986), preferences (s239), extortionate credit transactions (s244), s245 floating charges and s423 transactions defrauding creditors.
- Use the powers in Section 234–237 of the Insolvency Act 1986 to collect in the company’s property and enforce co-operation, help and compliance of the directors and others.
- To force utility companies (including IT providers) to continue supplies during the administration.
- Bind the company in to contracts with third parties, using his power of agency.
What can the administrator not do?
- Bring action under under s212 of the Insolvency Act for Misfeasance.
Also Section 216 IA 1986, the re-use of company names, does not apply in administration – the relevant rules only kick in if the company is subsequently liquidated.