What is an Administration?
An Administration is a formal corporate insolvency procedure that affords the appointed insolvency practitioner extensive and wide-ranging powers to deal with the Company’s business in order to rescue, restructure or sell the same for the benefit of the Company’s creditors.
An Administration can be an effective solution when a Company is under increasing financial pressure and the business is at risk. In most circumstances an Administration can place a “pause” on the creditor pressure and allow breathing space for the business.
As a result, Administrations are most effective when there is a core business, asset or client base of value where any further legal action or more lengthy procedure are not appropriate.
What is a “pre-pack”?
A “pre-pack” is a restructuring option which uses the powers of an Administration to achieve a sale immediately upon appointment. All the necessary valuations, negotiations, marketing and contract of sale are arranged prior to the appointment to ensure the sale is conducted at fair value.
A pre-pack can allow the Company’s directors (or third party) to seamlessly purchase the Company’s business, trade and assets and thereby ensure no loss of custom through enforced closure or other barrier. Similarly, such transactions can have significant advantages to the Company’s creditors as the proceeds of sale will allow a much improved return to creditors than what would have otherwise been available in a winding-up.
The principles adopted in any such transaction are outlined in Statement of Insolvency Practice 16 which ensures the highest of ethical standards are adopted throughout the process.
Appointment – requirements
Unlike a Liquidator in a CVL (where a Liquidator has a simple brief to realise as much as possible from the Company’s assets and distribute the proceeds to the creditors) an Administration has three distinct purposes, one of which must be achieved by the Administrator. These purposes can be found in paragraph 3(1) of Schedule B1 to the Insolvency Act 1986:
- Rescue the Company as a going concern;
- Achieve a better result for the Company’s creditors (than what would have been possible in a liquidation)
- Realising property in order to make a distribution to the secured and/or preferential creditors.
Careful consideration must therefore be given prior to appointment whether one of these targets can be achieved. If not, a CVL or CVA may be more appropriate.
Appointment – formalities
An Administrator can be appointed by various means – the exact choice of which method to seek an appointment will depend entirely on the specific scenario presented. Generally speaking, an Administrator can be appointed both at and out of Court.
A Moratorium on any other enforcement action will commence as soon as an application is filed at Court. This will not cease until the expiry date for the paperwork passes or at the end of an Administration.
Options for an out of court appointment include appointments by:
- By board of directors
- By resolution of shareholders
- By holder of a Qualifying Floating Charge Holder (“QFCH”)
An appointment out of court can only be sought if the Company is not currently in Liquidation, Administrative Receivership or already in Administration, if an application to place the Company into Administration is already in effect, if a winding-up petition against the Company has been issued or if an Administration or CVA has been in place within the preceding 12 months.
If such conditions do exist, an appointment at court should be sought. In such circumstances it is recommended that advice is sought without delay from a member of our team as further delay may seriously impact the value of your business.
Powers of an Administrator
As briefly mentioned above, an Administrator has a wide array of powers available to deal with the Company’s business and assets as efficiently as possible.
- Agency: Throughout the appointment, an Administrator acts as agent of the Company and does not contract personally. This allows the Company to be traded if needed whilst a purchaser is sought or contracts completed to realise value in remaining contracts;
- Moratorium: No legal process or action may be commenced by any party against the Company / Administrator without first seeking to remove the protection of the moratorium (which usually requires a separate hearing). This power has a significant benefit for any Company encountering enforcement action as the moratorium will effectively place a “stay” on the proceedings for the period of the Administration. This power can have benefits of a wide range of scenarios and further advice should be sought if you consider this may be of benefit to your business;
- Assets: The Administrator has the power to deal with the entirety of the Company’s assets, including those subject to fixed and floating charges.
Other matters to consider
- An Administration is scheduled to last 12 months, at which point the appointment automatically expires. This can be extended by creditor consent and by order of the Court if deemed to be necessary.
- An Administrator will be required to investigate the conduct of all Directors holding office within a three year period prior to the appointment and report on the findings to the Insolvency Service. This is required by the Company Directors Disqualification Act 1986 and other ancillary rules and regulations.
Benefits of an Administration
- Appointments can be made quickly and provide protection as soon as an application is filed
- Restructuring of non-profitable elements of the business can be undertaken, allowing business to trade as a going concern and be rescued
- Moratorium powers prevent any further recovery action whilst the Administrator is in office
- Administrations can complement a range of other restructuring tools – eg an Administrator can seek to implement a CVA alongside the Administration if the business can be rescued.
- Any Directors seeking to deal with the Company’s affairs in a proactive manner are far more likely to be seen in a positive light by the Insolvency Service when reviewing their conduct
Disadvantages of an Administration
- Directors will in effect relinquish control of the business to the Administrator. A sale or work out of the business can then be undertaken with little further input.
- The appointment of an Administrator is advertised and the Administrator is likely to find it difficult to ensure future supply if trading the business. Careful review of the supply arrangements are likely to be required in this scenario.
- Costs of an Administration can be higher as there are more statutory reporting requirements than any other formal procedure.