What is it?
Administration is a very useful process that protects a company from creditor pressure, and provides an automatic stay on any current or pending legal actions, usually to facilitate the rescue of the company or the sale of its business and assets on a going concern basis.
The process itself can take various different forms typically to facilitate one of the following:
An immediate sale of the business and assets on a going concern basis upon the appointment of an Administrator (referred to as a pre-pack administration);
A short period of trading during the Administration, under the supervision of the Administrator, while business and assets are marketed for sale; or
Trading throughout the process, at the end of which control of the company it returned to the director after a period of restructuring and the company has returned to profitability.
Purpose of Administration
In order for a company to be placed into Administration, you would need to demonstrate that at least one of the purposes of Administration as set out within statute is capable of being achieved. The 3 purposes of Administration are as follows:
To rescue the company on a going concern basis;
To provide a better outcome to creditors than would have been the case if the company was placed into liquidation; or
To provide a return to one or more secured or preferential creditors.
Who can appoint an Administrator?
Directors/Shareholders - A company can be placed into Administration voluntarily by either its directors or shareholders using an ‘out of court’ method. This is only possible in certain circumstances.
Qualifying Floating Charge Holders - A creditor who holds a debenture conferring a qualifying floating charge over the company’s assets, such as a bank or other finance provider, will usually also have the ability to appoint an Administrator ‘out of court’. Whilst many qualifying floating charge creditors prefer not to appoint Administrators themselves, they do have the ability to do so if they feel the need to protect their interests.
Court - Both of the above appointment processes do not require much input from the Court, other than the filing of certain documents. There are however provisions within insolvency legislation that allow creditors, directors, shareholders or a combination to apply to Court for a company to be placed into administration where an ‘out of court’ route is not available.
How quickly can a company enter Administration?
The timing of an Administration appointment will be dependent upon who is making the appointment.
Directors/Shareholder (‘out of Court’) – Where directors and/or shareholders opt to place the company into Administration, they will be required to serve a Notice of Intention to Appoint an Administrator upon various parties, including the company itself and any holder of a qualifying floating charge. In such circumstances, 5 business days’ notice must be provided. In some circumstances, no notice is required at all and a company can be placed into administration by simply filing the appropriate appointment documentation.
Qualifying Floating Charge Holders (‘out of Court’) – Similarly, a qualifying floating charge holder is required to serve a Notice of Intention to Appoint an Administrator, but only upon any holder of qualifying floating charge security that pre-dates their own. In such circumstances, 2 business days’ notice must be provided.
Court Application – An application to Court is often a more drawn out process as it requires formal applications, witness statements to be prepared, to be lodged at Court and served upon various parties pending a Court hearing to consider the application. We can advise you as to whether a formal application will be required or not.
How long does the Administration last?
As with all insolvency processes, there are many statutory duties to be fulfilled by an Administrator which could mean that the Administration remains open for months or years, even after the sale of the business and assets.
The Administration process comes to an automatic end 12 months after the Administrator’s appointment. By this time it is expected that the purpose of the Administration (as set out in statute) will have been achieved and the Administration will be brought to end in one of a number of ways. Most commonly an Administration will be brought to an end via a move to dissolution or converted to a Creditors’ Voluntary Liquidation (CVL).
Can the directors regain control of the company?
Upon the appointment of an Administrator, a director’s powers cease. The company will be controlled by the Administrator as an agent for the company. Notwithstanding this, the duties of the director remain and the Administrator will usually be heavily reliant upon the co-operation of the director to facilitate the continuation of trade and/or the smooth transition of the business and assets to a successful purchaser.
Can a director ‘buy back’ the business and assets?
It is not uncommon for directors or associated parties to incorporate a new entity to effectively ‘buy back’ the business and assets from the insolvent company. Understandably this is often frowned upon by creditors and other stakeholders, but is perfectly legal as long as the correct process is followed which will be guided by the Administrator.
If you are interested in ‘buying back’ the business from an Administration process, please contact us and we can explore the process in greater detail with you.