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Administration is a court based procedure which prevents creditors from taking enforcement action (such as a winding up petition) against a company.
What is Administration?
Administration is a court based procedure which prevents creditors from taking enforcement action (such as a winding up petition) against a company.
Administration is usually used where there is a prospect of rescuing all or part of a business. It is used to protect a business whilst it is restructured (for example reducing costs or exiting onerous contracts), sold as a going concern or its assets are sold.
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How does Administration work?
Various parties can apply to court for an Administration order, but the most common approach is what’s known as an ‘out of court’ application by a company’s
directors.
This process is relatively straightforward.
- The directors choose a licensed insolvency practitioner (usually an IP will have been advising the company in relation to its financial position for some time beforehand) and file the relevant forms with the court.
- If a company has one or more debenture holders (typically a bank or an asset based lender) then the director must notify them that they intend to
appoint an Administrator. The debenture holder then has five days within which to choose an alternative IP or consent to the directors’ original choice. If the debenture holder doesn’t intervene during this five day period the directors are then free to proceed with the appointment of their chosen IP. - The appointment of an Administrator is immediate upon the filing of the requisite forms at court.
Other parties that can also apply for an administration order would typically be either:
- A debenture holder (technically a “Qualifying Floating Charge Holder”) who can obtain an administration order using a similar filing process to the directors; or
- Other creditors, who must make a formal court application. This is a lengthier and more expensive process which requires a hearing in front of a judge.
What happens when a company is in Administration?
Once a company is in administration the administrator, rather than the directors, is in control of the company and no creditors can take any action to recover their money (except in very rare circumstances). The administrator’s role is to try to achieve the best possible outcome for creditors.
The administrator will usually adopt one of the following approaches, depending on the circumstances:
- Continue to run the business whilst trying to sell all or part of it.
- Continue to run the business for a short period of time whilst preparing a company voluntary arrangement proposal or some other agreement with creditors to defer or reduce their debts.
- Sell the business immediately (this is known as a “pre-pack”).
- Close the business and sell its assets, either to a single purchaser or via auction.
In addition to dealing with the creditors and trying to achieve the best possible outcome, the administrator also carries out a variety of other tasks. These include:
- Helping employees to make claims for the government for amounts owed to them such as redundancy pay, unless the business is sold as a going concern, in which case employees’ contracts will automatically move across to the new company so they will not need to claim from the government.
- Providing periodic reports to the creditors to advise them of what action has been taken during the administration and what the likely outcome will be.
- Investigating why the company filed and whether there has been any misconduct on the part of the directors or other parties.
At the end of the administration the company is either placed into liquidation so that funds can be distributed to creditors or it is simply dissolved.
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