What is Company Administration?

What Does Going into Administration Mean?

When a company goes into administration, it is entering into a formal legal process. The company also becomes formally insolvent.

An administration removes the powers of the company’s directors, although they have a continuing duty to the company. The Administrator is appointed as an agent who effectively manages the company. 

Additionally, an administration appointment creates a moratorium. The moratorium has the impact of freezing any current ongoing legal proceedings and preventing the issuing of any new legal proceedings, unless the Administrator or the Courts agrees to these actions continuing. 

This is a useful tool that enables an administrator to properly consider the company’s affairs to achieve the best outcome for creditors. 

Who can put a company in administration?

There are two company-led entries into administration. A company can place itself into administration by agreement of its shareholders, either through an out of Court process if necessary criteria are met, or through a Court application. Shareholders with sufficient voting rights can place a company into administration without the consent of the directors, although it is likely that if the directors resisted the procedure a Court hearing would take place.   

Alternatively, the company’s directors can by way of a board meeting agree to place a company into administration, again either in an out of Court process, if necessary criteria are met, or through a Court application. The consent of shareholders is not required in these circumstances.

Creditors who have the benefit of a qualifying floating charge can exercise their right to appoint an administrator under the terms of their security if the company enters into a breach of their funding agreement. This can be done either through an out of Court process, if necessary criteria are met, or through a Court application.

Finally, creditors may also petition the Court for the company to be placed into administration. This would result in a court hearing at which the Court would decide if it was appropriate for an administrator to be appointed.

How is the administrator of a business appointed?

A company administrator can be appointed in a number of ways, depending on the Company’s circumstances. 

Out of Court

If the company meets certain criteria, for example it is not the subject of a winding up petition, the directors or the company may appoint the Administrator out of court. 

If the Company has granted any creditor a Qualifying Floating Charge (“QFCH”) the directors or the company would file a Notice of Intention to Appoint an Administrator. If the QFCH did not exercise their right to appoint an administrator within five days, the directors or company may thereafter file a Notice of Appointment of an Administrator at Court, which would appoint the Administrator. 

Alternatively, a QFCH may appoint an Administrator of their choosing before the company has entered into administration. The company or directors would either have to have filed a Notice of Intention to Appoint an Administrator, or breached the terms of the QFCH’s charge in order for a QFCH to take this step. 

Any QFCHs may appoint an Administrator, but the first charge holder would have priority over the second charge holder, and so forth, if multiple QFCHs desired to appoint differing Administrators. 

From time to time, the QFCH may appoint an administrator at the company’s / directors’ request, if there are circumstances which would expedite the company’s entry into administration to preserve value for the QFCH and other creditors. 

Court Appointment

In certain circumstances, such as if a winding up petition has been presented against the company, it may only be possible to appoint an administrator by order of the Court. Additionally, creditors may only seek the appointment of an administrator by order of the Court. 

If this is considered appropriate, the directors, company, creditors, and QFCH may apply to Court for an order appointing an administrator of their choosing. In all instances, a hearing would be convened at the earliest opportunity to consider the application for the Administration Order, and any challenges to the application. 

If the Court concludes that appropriate grounds exist for the company to be placed into Administration, the Court would make an order placing the company into Administration and appointing the Administrator. 

Formal insolvency appointment of administrators

As with any insolvency procedure, there is a formal process to appoint Insolvency Practitioners (IP’s) as Administrators of the Company.

There are two processes for appointing administrators and whilst both involve the Court, one is commonly referred to as an Out of Court procedure and the other is referred to as a Court appointment.

In both scenarios, the appointment is made by the Court, but in an Out of court process the preparatory paperwork is handled by the directors, IP and solicitors, and filed at Court, confirming the appointment of the IPs as Administrator. To make an Out of court application the following must not apply:

Where the foregoing applies, the appointment must be listed for hearing at the Court, who will consider the application and order that the Company be placed into Administration, if the court deems this the correct procedure.

In either scenario, an appointment cannot be made until a Qualifying Floating Charge Holder has been given five business days’ notice of the proposed Administration or has consented to the appointment.

In both scenarios, once the court has sealed the Order, the IP’s is formally appointed as Administrator.

 

How are administrators paid?

An Administrator would propose his level of fees to creditors either as a fixed fee, percentage of realisations, or on a time costs basis (also known as a fees estimate).

Creditors would consider if these fees are appropriate and, if so, approve the fees to be paid from the sale proceeds of asset realisations achieved by the Administrator. 

From time to time, if significant work is required in the lead up to the Administration, the Administrator may agree a fee directly with the company if required. This fee would usually be paid from company funds, as the work of the nominated Administrator would be considered essential to preserving the value of the company’s assets for the benefit of creditors. 

What is the role of an insolvency practitioner in the Administration process?

Only a licenced insolvency practitioner can be authorised to act as an Administrator. Their role, prior to appointment as Administrator, is to advise the board of directors on the company’s current financial position and the options available to it. 

If it is concluded that an Administration is both an appropriate and necessary procedure, the company would appoint the insolvency practitioner to take the necessary steps to place the company into Administration. In these circumstances the insolvency practitioner would act as agent and would have effective control over the company, similar to that of a director, and be empowered under the Insolvency Act 1986 (as amended) to deal with the company’s affairs.

As the company is facing an insolvency event, at all times the insolvency practitioner must consider the company’s creditors, the impact that the steps taken by the company and / or the Administrator in the lead up to and upon appointment will have on them and the return available to them from the insolvency procedure. 

The insolvency practitioner should consider the benefits of each step for creditors as a whole, and not favour one class or creditor, to the exclusion of others. The insolvency practitioner should also be able to make practical and commercial decisions, to minimise costs and maximise returns for the general body of creditors. 

Can a Company Still Trade When in Administration?

A company can trade whilst in Administration, but only under the control of an Administrator, if they consider trading will lead to a better return for creditors. 

If the company has sufficient funds to meet the costs of trading, such as employees’ salaries and property rent, this may be considered by the Administrator. This also will allow the Administrator to market the company as a trading concern to prospective buyers. 

A pre-packaged sale may often be more appropriate as the company can seamlessly transition to a purchaser, without incurring the costs of trading. 

What is a Pre-Pack Administration?

A Pre-Pack Administration is a procedure where the nominated Administrator markets the company for sale with a view to concluding a sale immediately upon, or shortly following, their appointment as Administrator.  

What is the difference between a company in liquidation and administration? 

A liquidation is more commonly utilised where a company has limited marketability as a going concern and any sale will likely be for assets only. Administrations are more commonly used where there is scope to sell the company’s business, and in particular its name, trading style and goodwill.

Further details can be found in this article – Administration vs Liquidation, including :- 

• What happens to employees in Administration?
• Do employees get paid when a company goes into Administration?
• What happens to company directors in an Administration process?
• How long does an Administration last?
• When a company goes into Administration who gets paid first?

What is Administration followed by CVA?

An Administration followed by a Company Voluntary Arrangement (CVA) is a process where the company first enters into Administration. Thereafter, the Administrator proposes a CVA which would see the company returned to its incumbent directors (or others) and the company’s creditors would agree to repayment proposals within the CVA.

An Administration can assist as it provides a moratorium and enables the Administrator to trade the company, whilst CVA proposals are formulated and considered by creditors. 

Is going into Administration the same as going bust?

It can be. A Company Administration can be a terminal process. Equally, an Administration can rescue the core business, preserve jobs and yield dividends for creditors. In the latter scenario it would be better described as a business rescue as opposed to a shut down. 

The nature of each Administration will depend on the specific circumstances of the insolvent company.

Can a company recover from Administration?

Yes. Whilst the majority of companies go from Administration to Dissolution, often their core business, assets, and employees transfer to a purchaser who will run the business in a new entity and preserve its existence. 

It is also possible for an Administration to move to a CVA, which if successfully completed, would take the company out of formal insolvency.

An Administrator must meet one of the three statutory objectives of an Administration, and the first potential objective of an Administration is to rescue the company as a going concern.

How can Chamberlain & co can help?

Chamberlain & Co understand the stress of insolvency but are here to help. If you require any further information or would like to discuss your options with a licenced insolvency practitioner, we are available to talk on 01138681203  or advice@chamberlain-co.co.uk.