What is the difference between an Insolvency Practitioner and an administrator?
The following article outlines the differences between an Insolvency Practitioner and an Insolvency Administrator.
WHAT IS THE DIFFERENCE BETWEEN AN INSOLVENCY PRACTITIONER AND AN ADMINISTRATOR?
INSOLVENCY PRACTITIONER
An Insolvency Practitioner (IP) is someone who is licensed to act on behalf of companies and individuals when they are facing insolvency or acute financial distress.
A company going into administration means that a licensed Insolvency Practitioner is appointed to act as an Administrator. By doing so, from the date of appointment, the overall control and management of the company will be given to the IP – the administrator.
ADMINISTRATOR
An administrator has specific duties and responsibilities to creditors, and in the first instance will take control of the company to rescue the company as a going concern
If the administration fails to facilitate a rescue of the company, it should provide an opportunity to achieve a better result for creditors had the company been liquidated.
Finally, if the foregoing options are both unavailable, an administration must facilitate a dividend to the secured and/or preferential creditors.
If one of these goals cannot be met, then a company should not be placed into administration.
WHAT IS AN INSOLVENCY PRACTITIONER?
To act as a liquidator in the United Kingdom an individual needs to hold an insolvency licence which allows them to act as an IP.
Once an IP is exam-qualified, they may request a licence from a regulatory body, such as the ICAEW, which will allow them to refer to themselves as an IP and take insolvency appointments. We have covered the full responsibilities of an Insolvency Practitioner in our guide. Chamberlain & Co is authorised by the Institute of Chartered Accountants in England & Wales (ICAEW).
In real terms, there is no difference between a liquidator and an IP. The IP is a professional who needs to have sufficient experience working in the field and pass exams that include all forms of insolvency – both professional and personal. They also need to be fully conversant with the Insolvency Act, Insolvency Rules, Companies Act and any other relevant acts of parliament in existence. An IP must undertake continuing professional development and must keep themselves up to date with changes to the law, keep abreast of new legislation, and conduct their activities accordingly.
WHAT ARE THE DUTIES OF AN INSOLVENCY PRACTITIONER?
In a society where there is debt & lending, there will always be bad debt & default debtors. The role of the IP was created to deal with companies and individuals who are in default, hopefully intending to return them to solvency, but where this is not possible, to conclude their affairs equitably for all stakeholders in a professional manner.
An IP assesses the situation of financially distressed individuals and companies and then discharges the relevant processes, as an office holder.
WHAT IS THE ROLE OF AN INSOLVENCY ADMINISTRATOR?
Their main aim is to maximise the assets available within insolvency proceedings to recoup money for distribution to creditors and to minimise the effect the insolvency proceedings will have on the company or individual creditors.
They also have a responsibility to ensure clients are treated fairly and in an equitable manner. Frequently, an IP is required, and expected, to make commercial decisions in difficult circumstances, to ensure the best outcome for creditors.
In practice, an IP will seek to assist companies and individuals with financial difficulties and has a legal obligation to provide best advice. They are required to consider all options available such as restructuring, refinancing and not just insolvency procedures.
Currently in England & Wales insolvency legislation is set up as a recovery process with the overarching aim being to return individuals/companies to solvency to preserve jobs, future revenue streams, taxation and similar.
In addition to the foregoing, an IP must identify any areas of misconduct that have occurred before the insolvency procedure. This serves two purposes – the first is to identify transactions that can be challenged and overturned to release funds for the benefit of creditors. The second is to report to the Insolvency Service as appropriate on the conduct of the officers of the company, so it may consider if disqualification proceedings or similar are appropriate and in the public interest.
WHAT ARE THE DUTIES OF AN ADMINISTRATOR?
The overarching duty of an administrator is to realise the company’s assets for the benefit of creditors. Their role is very similar to that of a liquidator. However, the main difference between the two is that an administration requires a statutory objective to be achieved (detailed above) and also provides certain protections to the company which makes it easier for the administrator to trade the business and pursue certain asset realisations.
Usually, an administrator would only have to meet the company’s costs – employees, rent etc – for the period of trade with no requirement to meet historic liabilities. This means the company can benefit from one of two ways – first, if any specific projects are close to completion, these can be completed which would release funds to the company for the work completed. Not being able to undertake these projects can be detrimental to asset realisations.
Alternatively, the other reason for trading is to keep the business viable whilst a buyer is found. This happens frequently in retail – companies continue to trade whilst administrators negotiate with interested parties. For the purchaser, there is an inherent value in acquiring a business which is still ticking over as goodwill can be incorporated into any sale to maximise recoveries.
The other main benefit of an administration versus a liquidation is that the moratorium, which only exists in an administration, stops any new legal action commencing and freezes any existing legal action without the consent of the administrator or the courts. This is a useful tool to allow the administrator to protect the company and its assets, even where trading isn’t envisioned.
WHAT IS THE AIM OF AN ADMINISTRATOR?
As mentioned above, an administrator is an insolvency professional whose core aim is to maximise the available assets of the company to recoup as many funds as possible to reduce the negative effect of bad debt on the creditors.
To do this, they have to abide by three statutory regulations whereby they have to believe that at least one of the following situations applies to the case in hand. These are:
- The company may be rescued as a going concern.
- An administration would be better than a liquidation for the creditors. For example, this could mean that jobs are preserved through a sale of all or part of the company and its assets. In a liquidation, employee contracts are automatically terminated when liquidation commences, by operation of law.
- If the foregoing cannot be achieved an administration, at a minimum, should enable a dividend to the secured and/or preferential creditors.
Whilst in all circumstances an IP has a duty to provide best advice and recommend the most appropriate advice, sometimes a company may have a variety of processes available to them and the board of directors may need to decide which course to take. Whilst an IP needs to ensure they are comfortable with the course of action taken if none of the statutory requirements can be met, an IP should not consent to act as an administrator.
WHAT DOES AN INSOLVENCY ADMINISTRATOR DO?
An Insolvency Administrator is a term which may be used by the layperson to describe an IP who is the administrator of a company.
Within the profession, an insolvency administrator is a role within an Insolvency Practitioner’s team. The majority of an IP’s team will be administrators ranging from junior roles (school leavers, graduate trainees and similar) through to senior, decision-making roles.
The role of the insolvency administrator is to deal with day-to-day duties – liaising with creditors, monitoring the performance of cases and identifying issues for consideration and approval by more senior members of the team.
This role exists because IPs are highly experienced and qualified. As a result, they are likely to be the most expensive member of the team, so it is not economically viable for IPs to undertake more basic duties. As such these are delegated within their team to administrative staff, whose costs are less than IPs and proportionate to their level of experience.
As within many professions, there is a full hierarchy within an insolvency team with levels of management and lines of reporting, with the IP being the overall head of each case.
HOW ARE INSOLVENCY ADMINISTRATORS PAID?
How Insolvency Administrators are paid is entirely dependent on the type of work they are doing.
If providing advice to a client, normally this will be on a fixed fee basis where a fixed fee is agreed, or on a time spent basis. The type of fees will be agreed upon between the client and IP at the point of engagement.
In a formal insolvency procedure, the fees are categorised into two elements:
- Pre-appointment fees – which is the time incurred working with the client before formal appointment over their affairs;
- Post appointment fees- the time incurred after they are appointed.
An IP can agree pre-appointment fees directly with the client, and these fees may be paid before their appointment. In this situation, the payment must be disclosed to the creditors. Where fees are not paid pre-appointment they are usually taken in the first instance from asset realisations, and fee approval must be obtained from the appropriate body of creditors before fees can be drawn.
Most processes are operated on a time spent basis, also referred to as “time costs basis”, but under current legislation, an estimate of time costs must be provided at the time of approval. This figure then operates as a cap on fees and cannot be exceeded until further approval from creditors is obtained.
Different fee structures can be agreed upon, such as a fixed fee, a percentage of realisations, or a mixture of different types of fees.
Where there are unlikely to be very few or no assets within an estate, it is common for the IP to agree a fee with the client, which the client will pay from their personal funds.
ADMINISTRATION VS LIQUIDATION – WHAT’S THE DIFFERENCE?
An administration does not automatically mean the company in question will cease trading whereas a liquidation always does.
An administration is more commonly utilised as a rescue procedure, whereas liquidation is commonly a terminal process.
We have covered the subject in another article, read our guide to Administration Vs. Liquidation.
WHAT DOES GOING INTO ADMINISTRATION MEAN?
This describes the situation where an Insolvency Professional takes over the running of the company and undertakes the best course of action to try and save the company. The full process is listed in one of our other articles – What is Company Administration.
CAN YOU AVOID LIQUIDATION WITH A COMPANY ADMINISTRATION?
In theory – yes. An IP needs to establish that a minimum of one of the statutory situations (outlined above) can be fulfilled. The crucial factor is that the IP believes (rather than knows) that one of the requirements will be fulfilled. If an IP doesn’t believe at least one of these cannot be met, then they shouldn’t consent to act as administrator. This is so the administration is not abused and used as an avoidance technique.
In all cases, if your company is experiencing financial distress we suggest you seek advice from a qualified insolvency practitioner.
From a director’s perspective, a liquidation and an administration are very similar in that directors lose their powers and the Insolvency Administrator is required to investigate the directors and their affairs.
WHAT IS A PRE-PACK ADMINISTRATION?
Pre-pack administration is a procedure available to some insolvent companies if the core business can be rescued as a going concern, or it’s deemed to be in the creditors’ best interests. A pre-pack administration process involves a pre-arranged sale of all or some of the assets from the insolvent company to a new company.
If your company is in financial distress, consulting a professional such as an Insolvency Practitioner will minimise any problems and their help may realise assets more quickly. These highly experienced professionals will also liaise with creditors on the client’s behalf and take over the running of the process.
Understandably, both personal and company financial distress can be very distressing for the individual and/or company director and place them under significant pressure.
By seeking prompt advice from an insolvency practitioner, you can be supported through this difficult process by experts who understand the pressures you are facing and have experience in working swiftly to deliver a strategy to resolve the issues you face.
Chamberlain & co offers a free initial one-hour consultation which is discrete and can be held via telephone, face-to-face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team is used to making discrete enquiries on a name basis when working with you to produce a strategy to resolve your issues.
As with all insolvency practitioners, Chamberlain & Co are committed to delivering best advice in all scenarios, and the teamwork has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards.
You can contact us by calling 0113 242 0808; or by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here