Administration is a formal insolvency process, by which a company is placed under the control of a qualified insolvency practitioner, to enable them to achieve certain specific objectives.
In this article, Dan French explains what administration is and how it works in practice.
The objectives of a company administration
Once appointed, an administrator is required to achieve at least one of the following three statutory purposes, which are listed below in order of priority:
First objective: rescue the company as going concern
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.
Second objective: achieve a better outcome for creditors than in a liquidation
If the rescue of the company as a going concern 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.
Third objective: realise assets for the benefit of secured creditors
If the administrator cannot achieve either of the first two objectives, the last justifiable purpose for placing a company into administration is to realise the company’s property to make a distribution to the company’s secured or preferential creditors.
How does a company go into administration?
“In Court” application
This involves a formal application to the Court for an administration order. Various parties have the ability to make such an application, including creditors, directors and the company itself (via its shareholders).
This route is less commonly used, since it involves a formal hearing before a judge, and so risks considerable cost and uncertainty for the applicant compared to the out of court process. This process tends to be used only if there is fundamental disagreement between the directors/ shareholders, or a winding up petition has been filed against the company and there is no chargeholder willing or able to make an “out of court” appointment under their security (see below).
Whilst an individual creditor might have the right to apply to Court for an administration order, this is rare in practice, as it is difficult for a creditor to obtain sufficient information on the company’s affairs to be able to properly formulate their application.
“Out of Court” process
The simpler and more certain route for placing a company into administration is to use the “Out of Court” process. This process is far more commonly used than making a formal application to Court for an order, as it is (generally speaking) easier, quicker, cheaper and provides greater certainty over timing for everyone involved.
The process involves filing a notice of appointment (NoA) at court, accompanied by a few specified documents, which confirm that the administrators have been appointed to office. The NoA is a short form document that contains certain information, such as:
- identifying the company and the appointed administrators;
- that the administrators consent to act as such in relation to the company;
- confirming that the company is insolvent and not currently subject to other insolvency proceedings;
- that the company has its main interests based in England or Wales; and
- that the directors, the company or chargeholder (as appropriate) have resolved to put the company into administration.
This procedure may be commenced by either the company or its directors, or by a lender that holds a valid and enforceable registered debenture containing a floating charge over substantially the whole of the company’s assets (commonly known as a qualifying floating chargeholder (QFCH)).
A company cannot go into administration unless it is insolvent, or likely to become insolvent, but this requirement does not apply if the administration is commenced by a QFCH.
Notice of intention to appoint and the rights of a QFCH
If the company or directors wish to appoint administrators, they must first give formal notice of their intention to do so to any QFCH. That notice of intention to appoint administrators (NOITA) must also be filed at Court and formally served on the QFCH.
On receipt of a NOITA, that QFCH then has five business days within which to either consent to the appointment of the proposed administrators, or to seek to appoint alternative administrators (they cannot stop the process entirely).
If the QFCH simply chooses to do nothing, then the company or directors (as appropriate) will be free to file the NoA at Court once the five business day notice period has elapsed. The NOITA is only valid for ten business days from the date of filing, however, if they do not file the NoA within that period, they will have to start the notice process all over again.
The statutory moratorium – what to know
Any company facing insolvency is usually under severe creditor pressure. Threats of winding up proceedings, court action, forfeiture, recovery of goods pursuant to retention of title rights and ceasing to supply are all commonplace.
To assist the administrator in carrying out their job and avoid them having to fire-fight multiple individual creditor actions all at once, a general moratorium automatically comes into effect on the filing of a notice of appointment of administrators or, if one is required, the filing of a NOITA. This could be up to a fortnight before the administrators are actually appointed. The moratorium prevents anyone from beginning (or continuing) legal proceedings against the company while it is in place.
Directors have been criticised in the past for filing multiple successive NOITAs, to take advantage of this interim moratorium, which can be seen as an abuse of process. Whilst this can be justified in some circumstances, directors should only file a NOITA if they have a settled intention to place the company into administration.
There are also provisions in the Insolvency Act that prevent certain key suppliers from being able to terminate supply as a way of forcing payment of debts. Simple examples of this would be utility providers but it extends to other important supplies, such as IT services.
The role and powers of the administrator
An administrator must be a properly qualified insolvency practitioner and regulated by one of the recognised professional bodies (such as the ICAEW, ACCA or IPA).
The insolvency legislation gives an administrator wide-ranging powers to help them do their job. On appointment the powers of the statutory directors are suspended and the administrator effectively takes over the running of the company and its affairs.
Once appointed, the administrator acts as both agent of the company to which he is appointed and as an officer of the court. This dual role imposes a duty to act in good faith, fairly and honourably. An administrator must also be, and be seen to be, independent and impartial in their management of the company and its property.
Administration is a collective insolvency procedure, designed to protect the interests of all creditors. As such, an administrator must act with regard to the interests of the creditors as a whole.
Operating within the context of the three statutory objectives outlined above, the administrator’s role is essentially two-fold: first, to gather in and realise the company’s assets for the best price reasonably achievable, and secondly to investigate and report on the reasons for the company’s failure. There is some overlap here with the role of a liquidator and it is not unusual for a company to move from administration into liquidation, if extensive or protracted investigations are required.
The administrator’s first job, once appointed, is to take all the company’s property into their custody or control.
What strategy and creditor approval is needed during a company administration?
Any administrator appointed over a trading entity will ideally want to achieve a sale of the business and assets of the company as a going concern, saving as many employee jobs as possible in the process and achieving a much better return for creditors than they would face in a shut-down scenario. Typically, the administrator will follow one of three core strategies:
- An immediate sale via a “pre-pack” administration: This typically involves an accelerated sale process before the administrators’ appointment that identifies a preferred buyer, then a swift negotiation of a transaction for a sale of the business and assets of the company, which the administrator formally completes immediately upon their appointment. This has many perceived benefits, such as certainty of outcome, mitigation of risk, preservation of goodwill, minimising disruption to ongoing trade and reducing overall costs.
Click here to learn more about “pre-pack” administration.
Click here to read more about buying an insolvent business.
- A period of trading followed by a sale as a going concern: This involves the administrators taking over the trading of the company for a period of time, whilst the business is stabilised and marketed for sale. This is more common if the company has suffered an unforeseen critical event that has meant the company needing to urgently seek the protection of an administration but without having had the luxury of time to plan ahead for a sales process. This approach is often seen as a route to achieving a better collection of outstanding book debts, where ongoing trade can provide some leverage with both customers and suppliers.
- An orderly wind-down: If a sale as a going concern cannot be achieved (either with or without a period of prior trading), then the administrators will proceed to realise the company’s assets for the best price they can and wind-down the company’s operations. This may result in the company moving into liquidation or, if the administrator can successfully conclude all of the company’s affairs during the lifetime of the administration process, the company will move straight to dissolution.
Once appointed, the administrator must submit a formal set of proposals to the company’s creditors, setting out information such as: the background to their appointment, their proposed strategy for dealing with the company’s affairs and a summary of actions already taken, an estimated outcome statement, details of the basis of their remuneration and their proposed exit strategy. This report must be sent to creditors within ten weeks of the administrator’s appointment and the creditors have a right to approve or seek amendment to those proposals. Once approved, the administrators must then conduct the administration in accordance with those proposals.
What about the company’s employees?
The company’s employees are not automatically dismissed on the administrators’ appointment. In a pre-pack scenario, the employees will typically transfer automatically to the buyer on their existing terms and conditions, pursuant to the Transfer of Undertakings Protection of Employment regulations (TUPE).
If implementing a trading strategy, the administrator has 14 days from appointment to decide whether they will be keeping staff on or will need to make redundancies. For those staff that are made redundant, there is a statutory compensation scheme, operated by the National Insurance Fund which provides some protection. For those staff that are kept on, their ongoing wages will be met as an expense of the administration (subject to certain limits).
Other sums due to employees, including any unpaid wages that accrued before the administration, rank only as an unsecured claim.
Order of payments in a company administration
Once the administrator has realised the company’s assets, they will be in a position to distribute funds to the company’s creditors. There is a prescribed order of priority for making payments, as follows:
- Fixed charge creditors: Fixed charge assets are large, immovable assets that the company would not normally sell in the ordinary course of business. This includes assets such as real estate and large pieces of plant and machinery but can also include less obvious assets, such as goodwill and intellectual property. Any creditor that has security over such assets is paid first from the proceeds of sale of these assets – an administrator has no power to sell these items or to use fixed asset proceeds without the consent of the fixed chargeholder. Any surplus flows back into the administration estate.
- Costs and expenses of the administration: This covers any trading liabilities that the administrators have had to incur as part of the process and includes their professional fees. Please note that an administrators’ remuneration is subject to creditor approval – the administrator is not empowered to simply pay themselves from the company assets.
- Preferential creditors: This consists of certain specified employee claims, which are subject to a statutory cap, and certain specified Crown debts (primarily outstanding employer national insurance contributions, PAYE and VAT).
- Floating charge creditors and the prescribed part: Any QFCH will hold “floating charge” security over substantially the whole of the company’s assets. This entitles them to be paid from the proceeds of sale of those items in priority to any unsecured creditors. Since anything that is not a fixed charge realisation will most likely be a floating charge realisation, the payment of the expenses and the preferential creditors is first deducted from the floating charge realisations. To ensure that unsecured creditors receive at least something from the process, a further sum of floating charge realisations is ringfenced for the benefit of the general body of unsecured creditors. The prescribed part is calculated as a percentage of floating charge realisations, namely 50% of the first £10,000 of floating charge realisations and 20% thereafter, subject to a cap of £800,000 where the first ranking floating charge is created on or after 6 April 2020, or £600,000 where it was created before then.
- Unsecured creditors: The prescribed part and any remaining surplus will then be distributed amongst the remaining creditors on a “pari passu” basis: this means that every unsecured creditor receives a pro rata payment based upon the size of their debt. So, by way of a simple example, if there is £1m owed to creditors and £100,000 of available realisations, each creditor would receive 10p for every £1 they are owed.
- Shareholders: On rare occasions you can have a solvent administration, where the process results in all creditors being paid in full and there being a surplus remaining. In such circumstances, that value is usually returned to the shareholders in proportion with their shareholdings.
Click here to read more about how assets are distributed in a company insolvency.
What to consider when ending a company administration
An administrator must complete the administration as quickly as possible and will exit office as soon as they are satisfied that either they have met the statutory purpose for which they were appointed, or have formed the view that the purpose cannot be achieved and it would be more appropriate to move the company into liquidation.
The administration of a company automatically ends after one year, although it is possible to extend it beyond this, through creditor consent or an order of the Court. Administrations are often extended in this way, particularly in more complex situations.
If a rescue of the company is achieved, then control is handed back to the directors. If this is not achieved (which is far more commonly the case), then, depending on the circumstances, the administrators will either distribute the available realisations themselves, in accordance with the above order of priority, and then dissolve the company, or will move the company into liquidation to permit a liquidator to deal with any outstanding matters and then make the necessary distributions from within the liquidation.
Our Restructuring Advisory team have the required expertise and experience to assist you with any restructuring challenges you may face. Please contact us if you would like to discuss any aspect of this article or series.