Administration
Administration is one of the alternatives to liquidation of a company. It is only available for insolvent companies (IA 1986, Sch. B1, para 11) and is intended as a rescue mechanism.
The advantage of Administration is that there is a moratorium ('freeze') on creditor actions. This is a major factor as it gives the Administrator the time to try to rescue the company, if that is in fact possible.
The purpose of an Administration Order must achieve one of the following:
- 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 (without first being in administration); or
- realising property in order to make a distribution to one or more secured or preferential creditors.
The revised regime for Administration, introduced by the Enterprise Act 2002, was implemented on 15 September 2003. The revised regime replaces Administrative Receivership for charges coming into existence on or after that date, and radically remodels the old form of Administration. The reasons for the reform are twofold:
- Administrative receivership was seen to be too slanted toward the interests of the secured creditor who appointed the Administrative Receiver. This was at the expense of other creditors, and hampered the 'rescue' of a company in financial difficulty.
- The old model of Administration was unwieldy, expensive and often of indeterminate duration.
Receivership (including Administrative Receivership) still exists for charges created before 15 September 2003 but will become less important as time passes.
Key features of the new Administration regime include the following:
- Qualifying Floating Charge Holders ("QFCHs"), the company or directors are empowered to appoint an Administrator without petitioning the court, though the court route still exists known as "Out of Court Appointment".
A QFCH is a creditor who has the benefit of a Floating Charge created after 15 September 2003. A QFCH, which was created before 15 September 2003 has the choice of appointing either an Administrative Receiver or an Administrator - Creditors other than QFCHs can petition the court for an Administration Order.
- A QFCH can apply to court for an Order for its own Administrator to replace the one proposed or appointed by the creditor or directors. This would apply when the QFCH receives notice that creditors have applied to court for the appointment of an Administrator or that directors have will appointed an Administrator. The QFCH must receive 5 days notice before any appointment can be made but only when a QFCH exists.
- The Administrator is under a duty to act in the interests of all creditors, unlike the situation under Administrative Receivership. This applies even where a QFCH has appointed the Administrator.
- Administrators does not have the powers to make payments to unsecured creditors without court permission
The upshot of Administration is that it is a process to rescue the company or the business rather than being a precursor to CVA or liquidation.
Invariably most Administrations are dealt with by a Pre-Pack sale. The business is valued beforehand and on the appointment of the Administrator the business is sold on to "New Company".
The Administrator has to perform his duties in the interests of the company's creditors as a whole.
An Administrator is an officer of the court, no matter which route is used to appoint him. He has to be such in order to comply with EC Regulation on insolvency proceedings. He has to be an Insolvency Practitioner and will almost always be an accountant.
Once the Administrator is appointed the main moratorium comes into effect and protects the company whilst the administrator tries to rescue it.
The Administrator will put forward his proposals to a creditors' meeting which must be held within 10 weeks of his appointment. Creditors can seek further details or can amend the proposals. It is important to remember that the Administrator could have been appointed by the directors and the creditors may regard him as the directors' stooge.
The initial creditors' meeting can be dispensed with if:
- the creditors are likely to be paid in full;
- the unsecured creditors are unlikely to be paid at all; or
- only the third purpose applies (realising property in order to make a distribution to one or more secured or preferential creditors).
The Administrator is required to convene further meetings of the creditors if the court orders him to do so, or creditors holding 10% of the debts request it.
The creditors may establish a creditors' committee. The effects of the Administration Order are that:
- The company's affairs is managed by the Administrator and he acts as it's agent;
- The directors' powers cease, though they are still in office;
- The moratorium continues. No action can be brought against the company without the Administrator's or the courts consent;
- The Administrator controls the company's assets (but does not own them); and
- The Administrator carries out his proposals, which have been approved by the creditors.
The Administrator has statutory powers under Sch 1 to the IA 1986. He is, however, an officer of the court and obstruction of him could constitute contempt of court.
An Administrator acts as an agent for the company and is not personally liable on contracts made by him. He has 14 days to reject the existing contracts of employment otherwise it is deemed that he ahs adopted them.
In addition to these powers, he has the power to do anything necessary or expedient for the management of the affairs, business and property of the company. He is required to exercise his powers for the purpose of the Administration.
An administrator also has the power to:
- Remove and appoint directors;
- Call a meeting of creditors or members;
- Apply to the court for directions;
- pay money to a creditor but only with court's permission if it is to an unsecured creditor;
- Pay money to any party if it is likely to assist the administration;
- Deal with property that is subject to a floating charge;
- Deal with property subject to a Fixed Charge, subject to the permission of the Fixed Charge Holder or of the court; and
- Deal with property that is the subject of a hire purchase agreement.
One of the problems of the old Administration procedure was the difficulty of exiting without an application to court. The revisions brought in by the EA 2002 have greatly simplified the procedures.
The procedures for ending Administration are:
- Automatic end of the administration after one year from the date the administration took effect, unless extended by the court or by prior approval of the creditors;
- On application by the administrator to the court, if:
- He thinks the purpose of Administration cannot be achieved in relation to the company;
- He thinks the company should not have entered administration;
- A creditors' meeting requires him to make an application; or
- He thinks that the purpose of administration has been sufficiently achieved in relation to the company;
- He will make an application to court to bring the Administration to an end and ask the court to place the company into Compulsory Liquidation
- Termination where the object has been achieved (for administrator appointed by the out of court route);
- The court ending the administration on the application of a creditor;
- The court converting the Administration into liquidation, in the public interest;
- The Administrator converting the Administration into a Creditors' Voluntary Liquidation;
- The Administrator dissolving the company where he believes there is no property which might permit a distribution to creditors; and
- The administrator resigns, is removed, ceases to be qualified or is replaced by those who appointed him in the first place.
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