A quick guide to administration

What is administration?

An insolvent company, or a company likely to become insolvent can enter administration. Administration allows the reorganisation of the company’s affairs or the realisation of its assets for the benefit of creditors. When a company goes into administration, an insolvency practitioner takes over the control of the company’s affairs from its directors.

The first objective of any administration is to rescue the company (as opposed to the business that the company carries on) so that it can continue trading as a going concern. If the rescue of the company is impossible, the administrator must aim to achieve a better result for the company’s creditors as a whole than would be likely if the company were put into liquidation. If the administrator cannot achieve a better result for creditors as a whole, the purpose of the administration is to realise the company’s property to make a distribution to the company’s secured or preferential creditors.

The administration of a company automatically ends after one calendar year, unless the creditors or the court agrees to an extension. In practice, many companies remain in administration for more than one year and complex administrations can last several years.

If the administration leads to the rescue of the company as a going concern, the administrator hands control of the company back to the directors once the administration ends. However, this is rare in practice. More commonly, the net proceeds of the company’s assets are distributed to the company’s creditors, either by the administrator or by a subsequently appointed liquidator (who may be the same person as the administrator).

A secured creditor is, in general terms, entitled to be repaid from the proceeds of the secured assets. He may claim as an unsecured creditor for any balance. Once the company has repaid its secured liabilities, any remaining asset realisations are paid to unsecured creditors, who receive a share of the assets proportionate to the size of the company’s debt to them. The return to unsecured creditors may be as little as one or two pence in the pound, and can be nothing at all.

The Insolvency Act 1986 gives certain unsecured liabilities priority over the remainder. These liabilities, called preferential debts include certain employee claims and contributions to occupational pension schemes.

How does a company go into administration?

There are two ways in which a company can go into administration: by a court order made at a formal hearing or by certain parties lodging a series of prescribed documents at court (the “out-of-court route”).

An application for a court order can be made by one or more creditors of the company, the company itself, its directors, a liquidator, a supervisor of a company coluntary arrangement, or under section 359 of the Financial Services and Markets Act 2000 or section 87A of the Magistrates’ Courts Act 1980.

A company can be put into administration by filing at court a notice of appointment and certain specified supporting documents. This procedure may be commenced by either the company or its directors, or a party (often a bank or other commercial lender) which has a floating charge that meets the requirements of paragraph 14(2) of Schedule B1 (known as a qualifying floating charge holder or QFCH).

The administrator

An administrator must be a qualified insolvency practitioner. Often more than one administrator is appointed to act jointly.

An administrator is an agent of the company to which he is appointed(paragraph 69, Schedule B1) and an officer of the court. He has a duty to act in good faith, fairly and honourably. He must also be, and be seen to be, independent and impartial in his management of the company and its property.

What does the administrator do?

On appointment, an administrator must take all the company’s property into his custody or control (paragraph 67, Schedule B1).

An administrator has wide-reaching powers. He can do anything “necessary or expedient for the management of the affairs, business and property of the company”.

The administrator can, as the company’s agent, cause the company to contract with third parties. Sums due under such contracts are paid in priority to the administrator’s fees and expenses, and distributions to floating charge holders and unsecured creditors.

An administrator has a duty to perform his functions:

• As quickly and efficiently as is reasonably practicable.
• With regard to the interests of the creditors as a whole.

In many cases, the administration of a company leads to the sale of the company’s assets, often as part of a sale of the company’s business on a going concern basis. Where the sale of the company’s assets is agreed before the company goes into administration, and is then completed immediately after the start of the administration, this is referred to as a pre-pack administration sale.

Who pays the administrator?

In general terms, the costs incurred by the administrator are paid from the company’s assets. Paragraph 99 of Schedule B1 provides that the administrator’s remuneration and expenses are paid out in priority to floating charge security.

The level of the administrator’s costs can be challenged under paragraph 74 of Schedule B1 (see below), or through the creditors’ committee if there is one.

What does administration mean for a creditor of the company?

There is an automatic moratorium which means that it is not possible for a creditor to bring or pursue legal proceedings against the company or its assets (paragraphs 42, 43 and 44, Schedule B1).

It is possible to ask the administrator or the court for permission to bring proceedings against a company that is in administration. However, a creditor who has a monetary claim is unlikely to be granted permission; it is generally only claims that have a proprietary nature that are allowed to continue.

If you are owed money by a company that has gone into administration, often the best option is to submit details of your claim to the administrator (your proof of debt) and wait for the administrator to assess it. The court has held that time continues to run on claims during administration, so older-dated claims may need to be protected by obtaining the administrator’s acknowledgement of the company’s liability. This restarts the limitation period.

As a creditor, you may be able to join a creditors’ committee to help the administrator fulfil his functions (rules 2.50-2.65, Insolvency Rules 1986). Administrators have a duty to report to the company’s creditors on their progress. However, being a member of the creditors’ committee may provide an opportunity for you to have access to more detailed information and comment on the way the administrators are conducting the administration.

What does administration mean for an employee of the company?

Administration does not mean that the company’s employees are automatically dismissed. The administrator may “adopt” any contract of employment within the first 14 days of his appointment.

Any “qualifying liabilities” under adopted employment contracts are paid by the administrator in priority to his own fees and expenses, floating charge holders and unsecured creditors. Qualifying liabilities are restricted to “wages and salary”, including holiday pay, sick pay, payments in lieu of holiday and contributions to occupational pension schemes.

Other sums due to employees, including any unpaid wages that accrued before the administration, rank only as an unsecured claim .

What does administration mean for a director of a company?

When a company goes into administration, the directors’ powers are curtailed. A director cannot exercise any management power that could interfere with the exercise of the administrator’s powers without prior consent from the administrator (paragraph 64, Schedule B1). If the company ultimately comes out of administration and resumes trading, the directors regain their full powers.

Any officer of the company may be required to provide a statement of affairs, including details of the company’s assets, liabilities and creditors. It is an offence not to comply with this requirement.

What can I do if the administrator is doing a bad job?

Any concerns about the conduct of an administration should, in the first instance, be raised with the administrator directly or through any creditors’ committee. If the matter is not adequately resolved, the following statutory remedies may be considered:

• A creditor or member can apply for an order under paragraph 74(1) of Schedule B1 on the basis that the administrator’s conduct has unfairly harmed his interests, or that the administrator is failing to perform his duties as quickly or efficiently as reasonably practicable.
• A creditor or contributory can apply under paragraph 75 of Schedule B1 on the basis of any misfeasance by the administrator.
• In extreme circumstances, you can apply for a court order to remove the administrator.

The courts do not permit these remedies to be used by any one creditor to leapfrog claims of other creditors, nor to require the administrator to devote a disproportionate amount of time or resources to his particular claim.