When a company is facing financial difficulties, it may be placed into ,administration. There are 3 main purposes of administration that will vary depending on the needs of the company. A company may be placed into administration in order to:
- Rescue the company on a going concern basis;
- 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.
This means that the process will typically either involve the rescue of the company or the sale of the business and its assets.
When an administration occurs, it’s natural that the parties involved will be concerned about how their situation will be affected. In particular, ,creditors will be concerned about how the debts they are owed will be recovered. With this in mind, the following guide looks at creditor rights in administration, and how repayment is facilitated.
What Does Administration Mean For Creditors?
When a company is placed into administration, an automatic moratorium is enforced that prevents creditors from pursuing legal proceedings against the company and its assets. However, it’s important to emphasise that company administrators are appointed in order to benefit creditors. As we’ve mentioned previously, if the administration is not intended to restructure the company and return it to profitability, then it must provide a better outcome to creditors than a liquidation and provide a return to secured or preferential creditors. The automatic stay that is placed on legal proceedings against the company is in place to relieve creditor pressure on the company, giving them time to restructure or put the necessary procedures in place to repay creditors. It is not intended to limit creditor rights in administration or to disadvantage them.
Individual creditor rights in administration, will depend on the type of creditor. This will dictate the order in which repayments are made. With this in mind, let’s take a look at how the hierarchy of creditor rights in administration is decided.
Which Creditors Take Priority?
Secured creditor rights in administration will always take priority over unsecured creditor rights in administration. However the order in which secured creditors are paid, will depend on if they hold ,fixed or floating charges. Those who hold fixed charges will be at the top of the ladder for repayment, however secured creditors who hold floating charges are likely to be paid after preferential creditors. Once the company has repaid secured creditors, any remaining asset realisations are paid to unsecured creditors. As a result of the hierarchy for creditor rights in administration, in some instances, unsecured creditors may not receive any payment, if there are no assets left to be realised.
Secured / unsecured creditor rights in administration, fall into a hierarchy as follows:
- Secured Creditors (Fixed Charge)
- Preferential Creditors
- Secondary Preferential Creditors
- Secured Creditors (Floating Charge)
- Prescribed Part – Unsecured Creditors
- Unsecured Creditors
Additional Appointment Rights for Secured Creditors
It is common for secured creditors to hold a debenture conferring fixed and/or floating charges over the assets of the company. The debenture will be filed at Companies House and more often than not give secured creditors the right to appoint an administrator of their choosing ‘out of court’.
If a company or its directors attempt to place a company into administration ‘out of court’ a Notice of Intention to Appoint an Administrator must be served upon all secured creditors. Secured creditors may either consent to the appointment or decide to appoint their own Administrator.
What About Creditor Rights In Pre-Pack Administration?
We’ve discussed how creditor rights in administration are defined in a traditional administration, however you may be wondering how this translates when the sale of the business is pre packaged. In a ,pre-pack administration, the sale of the business is negotiated before an administrator is appointed. Secured creditors will often be given notice of the sale as their consent is often required for the release of their security. However, unsecured creditors are likely to be given notice until after the sale has been made.
The decision as to whether or not the sale will go ahead is ultimately in the hands of the administrator, making it difficult for creditors to stop the process should they wish to do so. This is enhanced by the fact that, in most cases, unsecured creditors will not be aware of the administration until after the sale is made. That being said, it’s crucial to emphasise that the administrator is legally required to act in the best interest of creditors, and so a sale will not be made that jeopardises creditor rights in administration.
For further guidance on creditor rights in administration, please don’t hesitate to ,get in touch with our experienced team of insolvency professionals at Ballard Business Recovery.
