What is an Administration?

The Significance of Administration for a Company

When a company enters administration, it is provided with a protective shield, commonly referred to as a 'moratorium', against legal actions from creditors. This gives the company a 'breathing space' to allow the administrator to formulate and implement a plan to rescue the company or maximise the return to creditors. It can be a lifeline for companies that are facing temporary financial difficulties but have a viable business model.

Differentiating Between Administration and Other Insolvency Procedures

While administration focuses on the rescue of the company, there are other insolvency procedures, such as liquidation, where the primary objective is to wind up the company and distribute its assets to the creditors. Another procedure is a Company Voluntary Arrangement (CVA), which allows a company to come to an agreement with its creditors to repay a portion of its debts over time. Each insolvency procedure serves a different purpose and is chosen based on the specific circumstances and needs of the company.

Role of Administrators in Insolvent Company Administration

Who is an Administrator?

An administrator is a qualified individual, usually a licensed insolvency practitioner, appointed to manage the affairs, business, and property of a company that is undergoing administration. Their primary goal is to rescue the company as a going concern or, if that isn't feasible, to achieve a better outcome for the company's creditors than if the company were to be liquidated.

Responsibilities and Duties of an Administrator

The administrator's role is multifaceted and includes a range of responsibilities, such as:

• Assessing the company's financial position and formulating a strategy for its rescue or the best possible outcome for creditors.

• Preparing and presenting proposals for the company's future to creditors.

• Managing the day-to-day operations of the company during administration.

• Realising company assets and distributing the proceeds to creditors in accordance with statutory priorities.

• Negotiating with creditors, suppliers, and other stakeholders.

• Making decisions about the company's contracts, employees, and assets.

• Ensuring compliance with all legal and regulatory requirements during the administration process.

The Importance of a Licensed Insolvency Practitioner

A licensed insolvency practitioner (IP) is a professional qualified and authorised to act in relation to an insolvent individual, partnership, or company. When it comes to administration, the role of the IP is crucial. They bring expertise, experience, and an understanding of the legal framework to the process. Their involvement ensures that the administration is carried out in accordance with the law, and the interests of all stakeholders, especially the creditors, are protected. Furthermore, only a IP can be appointed as an administrator, underscoring the importance of their role in the insolvency process.

Steps Involved in Company Administration

Initial Assessment and Appointment of an Administrator

Before the formal process begins, an initial assessment of the company's financial situation is conducted. This involves reviewing the company's assets, liabilities, cash flow, and overall financial health. If it's determined that administration is the most suitable route, an administrator, typically a licensed insolvency practitioner, is appointed. This appointment can be made by the company's directors, its creditors, or by a court order.

Formulation of Administration Proposals

Once appointed, the administrator will formulate a set of proposals outlining the strategy and actions to be taken during the administration. These proposals will detail the administrator's plans for the company, whether it's rescuing the business as a going concern, achieving a better result for the creditors than would be likely in liquidation, or realising property to make a distribution to secured or preferential creditors.

Implementation of the Administration

With the proposals in place, the administrator will then begin implementation. This may involve restructuring the company, selling assets, negotiating with creditors, or even finding a buyer for the business. Throughout this phase, the administrator has control over the company's operations and will make decisions that align with the best interests of the creditors and the objectives of the administration.

Communication with Creditors and Stakeholders

Transparency and communication are vital during the process. The administrator is required to keep the company's creditors informed about the progress and any significant developments. This is typically done through regular reports and meetings. Creditors have the right to approve or amend the administrator's proposals, and they play a crucial role in determining the outcome of the administration.

Legal Aspects of Company Administration

Legislation Relevant to England & Wales

The primary legislation governing insolvent company administration in England & Wales is the Insolvency Act 1986, as amended by the Enterprise Act 2002. This legislation sets out the framework and procedures for placing a company into administration, the powers and duties of administrators, and the rights of creditors and other stakeholders. Additionally, the Insolvency Rules 2016 provides further details on the procedural aspects of administration.

The Role of the Court in Administration

The court plays a pivotal role in the process. While directors or creditors can appoint an administrator without court intervention, in certain circumstances, a court order is required. For instance, if a company is already in liquidation or under a winding-up petition, a court order is necessary to appoint an administrator. The court also has the authority to remove an administrator if it believes they are not performing their duties adequately. Moreover, certain decisions made by the administrator, such as selling assets at undervalue, may require court approval to ensure fairness and transparency.

Differences Between Administration and Administrative Receivership

While both administration and administrative receivership are insolvency procedures, there are distinct differences between the two:

1. Purpose: Administration aims to rescue the company as a going concern or achieve a better outcome for the company's creditors. In contrast, administrative receivership primarily focuses on realising assets to repay a specific secured creditor, usually a bank.

2. Appointment: An administrator can be appointed by the company's directors, its creditors, or by a court order. An administrative receiver, on the other hand, is appointed by a secured creditor with a floating charge (usually a bank) over the company's assets.

3. Scope: An administrator takes control of all the company's assets and operations, whereas an administrative receiver only takes control of the assets over which their appointor has a charge.

4. Outcome: Administration can result in various outcomes, including the rescue of the company, a sale of the business, or liquidation. Administrative receivership typically ends with the sale of the charged assets to repay the secured creditor.

It's worth noting that the Enterprise Act 2002 significantly restricted the use of administrative receivership, making administration the more common procedure for insolvent companies in England & Wales.

Implications of Insolvent Company Administration for Creditors

How Creditors are Affected During the Administration Process

When a company enters administration, it can have significant implications for its creditors. Firstly, there's an immediate freeze on legal actions against the company, known as a moratorium. This means that creditors cannot start or continue with legal proceedings to recover their debts without the administrator's consent or the court's permission. This moratorium provides the company with a 'breathing space' to allow the administrator to assess the best course of action.

Priority of Creditor Payments

In an administration, the order in which creditors are paid is strictly defined:

1. Costs of the Administration: Before any other debts are settled, the costs and expenses of the process are paid. This includes the administrator's fees and any legal or professional fees incurred.

2. Preferential Creditors: These are typically employees who are owed arrears of wages or holiday pay. They are paid next, after the costs of the administration.

3. Floating Charge Holders: Creditors who hold a floating charge over the company's assets, such as banks or other financial institutions, are paid after preferential creditors.

4. Unsecured Creditors: These are creditors who do not hold any security against the company's assets. They are paid from any remaining funds after the above creditors have been settled. This group includes suppliers, customers, and HM Revenue & Customs.

5. Shareholders: If there are any funds left after all the creditors have been paid, they are distributed among the company's shareholders.

Protection and Rights of Creditors

Creditors have several rights and protections during the administration process:

1. Right to Information: Creditors have the right to be kept informed about the progress of the administration. The administrator must send regular reports and updates to all creditors.

2. Right to Approve Proposals: The administrator's proposals for the company must be approved by the creditors. If the creditors do not agree with the proposals, they can suggest amendments.

3. Right to Form a Creditors' Committee: Creditors can form a committee to represent their interests during the administration. This committee can consult with the administrator and sanction certain actions.

4. Right to Challenge the Administrator: If creditors believe the administrator is not performing their duties adequately or is acting against their interests, they can challenge the administrator's actions in court.

In summary, while the process prioritises the rescue of the company, creditors have several rights and protections to ensure their interests are considered and protected.

Potential Outcomes for an Insolvent Company and its Creditors

Successful Restructuring and Rescue of the Company

One of the primary objectives of administration is to rescue the company as a going concern. If the administrator believes that the company can be saved, they might implement a restructuring plan. This could involve renegotiating contracts, reducing overheads, or finding new investment. A successful restructuring can allow the company to continue trading, preserving jobs and potentially providing a better return for creditors than if the company were to be liquidated.

Sale of Company Assets and Distribution of Proceeds

If rescuing the company as a going concern is not feasible, the administrator might decide to sell the company's assets. This could be done as a whole (a 'going concern' sale) or by selling individual assets separately. The proceeds from these sales are used to repay the company's creditors. The order of payment is strictly defined by law, with certain creditors (such as those with fixed charges or preferential status) being paid before others.

Transition from Administration to Other Insolvency Procedures

In some cases, once the objectives of the administration have been achieved, the company might transition to another insolvency procedure:

Company Voluntary Arrangement (CVA)

If the company and its creditors agree on a repayment plan for the company's debts, it might exit administration and enter into a CVA. This allows the company to continue trading while repaying its debts over an agreed period.

Liquidation

If rescuing the company is not possible and assets have been sold, the company might be put into liquidation. This involves selling all the company's assets and distributing the proceeds to creditors. Any remaining debts are written off, and the company is dissolved.

Dissolution

If the administrator believes that all the objectives of the administration have been achieved and there are no funds to distribute to creditors, they might apply to the court to have the company dissolved.

In conclusion, the outcome of an administration depends on the company's circumstances and the best interests of its creditors. Whether it's a successful rescue, asset sale, or transition to another insolvency procedure, the aim is to achieve the best possible result for all stakeholders involved.

Importance of Seeking Expert Advice

Risks of Navigating Administration Without Expert Guidance

Administration is a complex legal process, and attempting to navigate it without expert advice can be perilous. Companies risk:

1. Misunderstanding Legal Obligations: Without a clear understanding of the legal framework, companies might inadvertently breach their duties, leading to potential legal repercussions.

2. Financial Missteps: Incorrectly prioritising payments or failing to maximise asset values can result in significant financial losses.

3. Damaging Stakeholder Relationships: Mismanaging communications with creditors, employees, and other stakeholders can harm the company's reputation and future business prospects.

How LiquidatorsUK Can Assist Struggling Companies

While LiquidatorsUK specialises in Creditors' Voluntary Liquidations, our expertise in the insolvency sector allows us to:

1. Provide Clear Guidance: We demystify the complexities of insolvency, ensuring that company directors understand their responsibilities and options.

2. Develop Tailored Strategies: Every company's situation is unique. We craft bespoke strategies that align with the company's objectives and the best interests of its creditors.

3. Facilitate Communication: We liaise with creditors and other stakeholders, ensuring transparent and effective communication throughout the process.

The Benefits of Consulting with Licensed Insolvency Practitioners

Seeking advice from licensed insolvency practitioners like LiquidatorsUK offers several advantages:

1. Expertise: With a deep understanding of insolvency law and best practices, we can guide companies through even the most challenging situations.

2. Peace of Mind: Knowing that experts are managing the process allows company directors to focus on other critical aspects of their business.

3. Maximising Outcomes: Our goal is to achieve the best possible outcome for all stakeholders. Whether that's maximising asset values in a Creditors' Voluntary Liquidation or ensuring a smooth transition to another insolvency procedure, we're committed to delivering results.

In conclusion, while facing financial difficulties is undoubtedly challenging, companies don't have to face it alone. With expert guidance from LiquidatorsUK, they can navigate their challenges confidently and optimally.

If your company is facing financial difficulties, don't hesitate to reach out to us at LiquidatorsUK. As licensed insolvency practitioners based in Leeds, we specialise in Creditors' Voluntary Liquidations. Give us a call on 0800 169 1536 or leave an enquiry on our website. We're here to help.