Administration
What is it?
The administration procedure was reformed as a result of changes in insolvency legislation introduced by the Enterprise Act 2002. These reforms were designed to make administration easier to access and more efficient, making it the primary process for business rescue.
The administration procedure is an alternative to receivership or liquidation with its primary purpose being the survival of the Company or of part of its operation as a going concern. This may be by way of a sale or by the Company entering into a Company Voluntary Arrangement ("CVA").
Who is it for?
This process is of use to companies which have become insolvent and require protection of a legal process. It prevents creditors taking precipative action against it whilst it is assessing it's options for re-organisation, re-finance, re-structure or the sale of the business as a going concern.
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The Process
- Whilst in administration, the affairs of the Company are managed by a licensed Insolvency Practitioner
- An administrator can be appointed out of Court by the holder of a qualifying floating charge or by the Company or its directors
- An administrator can also be appointed by the Court on the application of the Company, its directors or one or more creditors
The objective of administration is:
- 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, or
- Realising the assets of the Company in order to make a distribution to one or more secured creditors
The
administration procedure can provide protection against aggressive creditor
action.
Whilst in administration, and without the consent of the administrator
or the permission of the Court:
- No resolution may be passed for the winding up of the Company
- No steps may be taken to repossess goods in the Company's possession under a hire purchase agreement
- A landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the Company
- No legal process may be instituted or continued against the Company or property of the Company
- An administrative receiver may not be appointed
Advantages
- The administrator has a reasonable time period in which to create sound proposals. By comparison, stand alone CVA proposals (without an administration order) often need to be drafted within pressurised time constraints. This can lead to unnecessary error
- It is be possible to set aside certain prior transactions that are voidable. This can increase returns to creditors
- May, in appropriate circumstances, lead to highest and speediest return for creditors
- Prevents one creditor "leap-frogging" claims over and above other creditors
- Directors are controlled by the administrator
- The floating charge holder (i.e., the bank who holds a debenture) who can appoint an administrative receiver still has at least five days notice in which to appoint an administrative receiver. However, it is noted that five days is not a very adequate time period to make this decision. Therefore, it is generally essential to fully consult banks prior to presenting the petition for an administration order
- Allows protection (or a moratorium) while the rescue plan (such as a CVA) is being approved. This can often be essential if hostile creditors are enforcing their claims
- Administrations put an "independent" licensed insolvency practitioner in control - rather than leaving the directors in control. This is often seen as beneficial to creditors, as the directors (arguably) may have caused the failure
- It is be possible to set aside certain prior transactions that are voidable. This can increase returns to creditors
Disadvantages
- Administration can be very costly
- Although administration orders can be rapidly obtained, there is still considerable time-consuming work (required for the independent person's report) prior to presenting the petition and obtaining the resulting administration order. This may mean that it may be more appropriate to go (for example) directly to a stand alone CVA without obtaining an administration order
- It can be difficult to finance the initial stages of administrations
- It may merely postpone the inevitable failure of the company
- Secured creditors with a floating charge (i.e. a bank) may be "forced" into a rapid decision and appoint an administrative receiver prior to the administration order being made
- The administrator - rather than the directors - is in control
- Applying for an administration order may force floating charge creditors (say a bank with a debenture) into a rapid decision and they may appoint an administrative receiver prior to the administration order being made
- Administration orders require considerable publicity
- Notices are published and advertised, and the company letterhead and documentation must state that the company is in administration
- Therefore, the fact that the company is in administration is known to everybody who deals with the company. This may adversely affect the rescue and restructuring plan
- This is not the case in a stand alone CVA
Call us
on 0800 195 4585 for advice regarding 'Administration'.
