No one wants to see their business go into administration. The perception is that administration is a process for businesses that are about to disappear, there being no need for the business any more or the business model is fundamentally broken and unfixable. But this is not always so, especially if it’s COVID-19 that has led to the company’s financial difficulties. Administration can especially in these cases be a highly effective procedure for protecting and restructuring the business so that it can come out the other side of COVID-19 in as good a condition as possible, rather than simply disappear.
Why is that?
Each administration has, by law, to have a ‘purpose’. The 3 purposes allowed under the law are
- Rescuing the company as a going concern, or
- 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), or
- Realising property in order to make a distribution to one or more secured or preferential creditors.
It’s no coincidence that the first purpose is to rescue the company as a going concern. Indeed the law says that these purposes do not all have the same priority, that of rescuing the company as a going concern must be looked at first and foremost and only if that cannot be achieved can the administrator look to the other two purposes. That’s to say first and foremost the law expects administration to be used as a positive tool for saving businesses rather than a tool for simply realising money for the creditors.
And in order to rescue the company, the law gives the administrator a number of powers to:
- Hold the business together, preventing creditors from seizing the assets and forcing some essential (albeit limited) suppliers to continue supplying; thereby
- Providing the company with a breathing space so the directors and administrator can formulate a plan for preserving the business for the benefit of the creditors as a whole.
Here’s more of what you need to know…
Can a company continue to trade during administration?
Yes, it can. It doesn’t have to though – the administrator can mothball the business.
Who manages the business during the administration?
Administrators are, unlike liquidators, agents of the company, they tend not to be personally liable for commitments made. Also the law enables the administrator to leave the task of managing the company on a day to day basis with the directors. Insolvency Practitioners and their staff are expensive beasts, but allowing the management of the business (whether or not it is continuing to trade) to remain with the directors, albeit within certain agreed limits, enables the costs of the administration to be kept down. Don’t get me wrong, the administration process isn’t cheap, but the fact that the administrator can limit his/her involvement to only the essential functions required of an administrator and not get embroiled in other matters does reduce the costs from what they might otherwise have been had the administrator not had the protection of agency and the ability to effectively ‘delegate’. Note that it’s not strictly delegation, it’s enabling the directors to continue using their existing powers. But it’s not a decision made lightly, the administrator will need to have utmost confidence in you because if things go wrong, expensive litigation and impact on personal reputation often quickly follow – so expect the administrator to be peering over your shoulders during this period, and recognise that at the end of the day it’s him/her and not you that have the final say.
Having said that, at the end of the day, who’s better placed than you the directors to manage your business, the administrator who knows nothing of it or you!? It’s a decision that’s often a bit of a no-brainer.
Creditor / Supplier management
Let’s remind ourselves of the purpose of the administration – it’s to stabilise the company and protect the business.
With this in mind the law gives the administrator the power to:
- Require certain suppliers to continue supplying essential services to the company during the administration.The relevant law is in in Section 233 of the Insolvency Act. The list of essential ‘utility’ suppliers includes gas, water, electricity, telephone, IT (there’s quite a list of IT services covered) whether directly or indirectly eg through a landlord.
No longer can such companies hold the insolvency practitioner to ransom. Sure, they can ask for a personal guarantee from the administrator, but they can’t make payment of the historic debt a condition of continuing to supply. This might just enable the business to be held together – this can be useful where a manufacturing company has a large gas or electricity spend need to hold back an aggressive gas / electricity supplier who then also has to continue to supply; also a company reliant on a particular IT provider can do the same.
Note that suppliers of goods and services that aren’t listed in Section 233 aren’t covered by the law, continuing to supply is a commercial matter, such that the administrator has the power to…
- Make other essential payments, or pause / halt them, where doing so helps stabilise the company and protect its business, helping reduce or eliminate any cash flow issues the company might otherwise have had.Therefore, the administrator can treat an essential ‘non-utility’ supplier differently from the rest and pay them if he believes doing so helps him achieve the purpose of the administration. In practice the administrator sits with you the directors and decides what payments, if any, must be paid in order to protect the business, and what payments can be paused / frozen.
Can an administrator raise more money?
The short answer is yes, he can.
The law gives administrators the power to raise or borrow more money. And that ‘new debt’ is given priority over most of the company’s existing debts.
It doesn’t happen a lot, but it’s a power worth remembering.
We’re likely to be in a new world going forward post CV-19, can we restructure?
Yes, administration can be used to set up a Company Voluntary Arrangement (‘CVA’) or Scheme of Arrangement. And a package of reforms to insolvency law might come into place once the government reconvenes – the so called proposed ‘the new restructuring plan procedure’. Read my blog on CVAs by clicking here.
Can the administrator get Government COVID-19 Support?
Yes, the administrator can, if the company fits the criteria, get government support like any ongoing company that’s not in administration. For example, he can furlough employees and get in a grant(s).
Can the administrator terminate contracts?
Contracts with companies in administration are not automatically terminated, so the strict terms of each contract will prevail – sometimes contracts give a party the right to terminate, sometimes not, it’s important to know the detail of what the contract says – what’s a mere option, what an obligation? And unlike liquidators, administrators do not have a right to disclaim onerous / unprofitable contracts.
The administrator, after weighing up the financial and other implications of his options, decide not to perform a contract if that helps achieve the statutory purpose of the administration. The other party can seek an order from the court for ‘specific performance’. But that’s a costly process and one that’s not sure to succeed. And if the court decides not to make the order for specific performance, the party will either set off the loss they’ve suffered against any debt they might owe the company in administration or have an unsecured claim against the company.
How heavily is the Court involved?
The answer is ‘not a lot’. The administrator can go to court to seek a decision / directions on a matter over which he would like clarification, but generally, he doesn’t need to go to court at all. This keeps the costs down and makes the process speedier than say other foreign jurisdictions.
In conclusion…
… Don’t rule out the administration procedure as a tool for stabilising, protecting and rescuing a business.
Paul Brindley
T: 07813 102014
14 April 2020