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Administration

Administration is a process whereby a licensed Insolvency Practitioner takes control of an insolvent company at the instigation of either its Directors or secured Creditors. Whilst ever the Company remains in administration it is protected from litigation and creditors attempting to retrieve or sieze assets to improve their position. The reason for this is to allow the Administrator to devise a plan to either try and rescue the Company, or at least achieve a better realisation of its assets than would be achieved in liquidation.

Administration can allow a Company to continue to trade, thus preserving jobs and the business, whilst an attempt is made to find a purchaser for those assets. In some instances a “pre-pack” takes place. This refers to an arrangement whereby the sale of assets of the Company, or part of its assets is negotiated prior to the appointment of an Administrator, the Administrator then enters into a sale agreement on or shortly after this appointment. There are strict regulations concerning pre-packs which often involve the existing Directors of the Company, in such cases they need to ensure that they seek independent advice.

WHO CAN APPOINT AN ADMINISTRATOR

An Administrator has to be a licensed Insolvency Practitioner. They can be appointed by:-

I. The Court

II. By the holder of a qualifying floating charge [usually the Bank]

III. By the Directors of the Company

IV. By the Shareholders of the Company

PURPOSE OF ADMINISTRATION

The law sets out the only three statutory purposes of administration. The Administrator of a Company must perform his functions with the objective of –

a. Rescuing the Company as a going concern,

b. Achieving a better result for the Company’s creditors as a whole, than would be likely if the Company were placed into liquidation,

c. Realising property in order to make a distribution to one or more secured or preferential creditors.

The Administrator must perform his functions in the interest of the Company’s creditors as a whole, unlike an administrative receiver who’s primary role is to secure assets for the debenture holder that appointed him. An Administrator must consider the impact of his actions on all of the different categories of creditors.

APPOINTING AN ADMINISTRATOR

In practice the vast majority of appointments are either by the Company's Directors or by a secured creditor with a qualifying floating charge (usually the Company’s bank). The vast majority of our appointments have been by the Directors of the Company. The procedure involved is relatively straight forward:-

A board meeting is held and the decision made to go into Administration.

Where there is a debenture holder with the relevant qualifying floating charge, that floating charge holder must first be given at least 5 business days written notice, on a statutory form of Notice of Intention to Appoint. This is to give the charge holder the opportunity of either agreeing to the appointment or appointing their own Administrator.

Once the 5 business days have elapsed or the debenture holder has indicated that they consent to the appointment, the Directors sign further appointment documents which are filed at court and an Administrator is deemed appointed.

When there is no relevant qualifying floating charge, the Directors appoint the Administrators. The appointment takes effect once the relevant documents are filed in court.

WHEN IS ADMINISTRATION APPROPRIATE

Where a Company is under significant pressure from creditors; who are looking to take enforcement action through the courts; instructing bailiffs to sieze assets; or looking to retrieve goods/vehicles/premises; administration throws a protective shield over the assets of the Company. This is particularly appropriate where there is a solid core business that has a good chance of survival.

One of the keys to a successful administration is the pre-planning that will take place between the Directors and Insolvency Practitioners. If the Insolvency Practitioner is looking to trade the Company in some form, they will want to ensure that cash flow forecasts demonstrate at least a break even situation otherwise they will be reluctant to take the appointment.

We have found that administrations work best where the Directors work closely with us in the vital first weeks following our appointment. How the initial trading is to be funded is a major consideration.

PRE-PACKS

Pre-packs occur when the sale of all or part of the Company’s business or assets is negotiated prior to the appointment of the Administrator, with the sale taking effect on or shortly after the Administrator's appointment. It has become controversial that the sale can take place before the Creditors have had the chance to approve the Administrator's proposals.

Detailed guidance is now being provided to the Insolvency profession as to the steps they must take to report a pre-pack sale to creditors. It must be borne in mind that the Administrator's role is to perform his functions in the interest of the Company’s creditors as a whole. This is true even in the pre-appointment period, when the Administrator is advising the Company not the Directors. If it is the Directors (which is often the case) who are seeking to purchase the assets by way of a pre-pack, they must be made aware that they need to seek independent advice. Of particular concern will be the transfer of employee's under the Transfer of Undertakings (Protection of Employment) Regulations. The Administrator is there to advise the Company and not the prospective purchasers.

If a pre-pack does take place there are detailed guidelines as to what information must then be released to creditors. This is so that the transaction is as transparent as possible. The Administrators must be able to justify why they have gone down this route to dispose of the assets, rather than to advertise the business/assets to the market.

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