In contrast to, which ends with the termination of the company, an administration is an attempt to rescue the company as a going concern.
By putting a company in administration, a statutory moratorium automatically takes effect that stops and prevents all debt recovery actions against the company by its creditors. This may allow an administrator time to re-organise the business of the company or sell off parts or the whole of the company or to enter into a company voluntary arrangement, in an attempt to find the required funds to set up acceptable repayment of debts while keeping the company trading and avoiding liquidation.
The purpose of an administration
The main aim of administration should be to enable the company to continue as a going concern.
However, the administrator need not perform their functions in order to achieve the main aim if they believe:
If neither the main or secondary goal mentioned above is reasonably practicable the purpose of the administration may alternatively be to realise the property of the company to make payment to secured or preferential creditors, as long as that doesn't unnecessarily harm the interest of the creditors as a whole.
The administrator does not need to identify in advance which objective they intend to pursue.
Which companies can go into administration?
Administration is only possible if one of the following applies to the company:
Routes to administration
A person may be appointed administrator of a company by:
Who can apply for an administration order?
Only the following people can apply to court for an administration order:
When can the court make an administration order?
The court can only make an administration order if it is satisfied that the company is, or is likely to become, unable to pay its debts, and that the administration is reasonably likely to achieve the purpose of administration.
Application for administration order where company in liquidation
If the company is in voluntary liquidation, then only the liquidator of the company can apply to court for an administration order. If the company is in compulsory liquidation the liquidator or the holder of a qualifying floating charge may make an application to the court for an administration order. The court will on granting the administration order also make such orders as might be required to discharge any winding-up order and deal with the transition from liquidation to administration.
Court procedure for appointment of an administrator
The application to get the administration order is made by paying a fee and filing various documents, with prescribed content, at court. These documents include the administration application, a witness statement and a consent to act from every administrator proposed in the application.
The court will issue the application and give a date when the hearing will take place. An interim moratorium immediately becomes effective when the application is issued by the court.
As soon as possible after the application has been issued, the applicant must notify the following people by service on them of a sealed copy of the application:
At the hearing the court will make an administration order on the application if:
However, if the applicant is a qualifying floating charge holder the court only has to be satisfied of the last of these.
Who can appoint an administrator?
Only the following people can put an administrator in control of a company without a court order:
The out-of-court procedure can't be used where the company is in liquidation, or an administrative receiver or a fixed charge receiver is in office in respect of the company or where there is a pending winding-up petition.
Out-of-court procedure for appointment of an administrator by the company or directors
The company or directors will start the out-of-court procedure by giving any qualifying floating charge holder (QFCH) and any other person who may be entitled to appoint an administrative receiver of the company, at least 5 days' written notice of their intention to appoint an administrator. (The QFCH can at any time during the 5 days' written notice period appoint their own administrator to the company. It can't however prevent the company from going into administration.) Notice of intention must also be given to the company (unless it is the company giving the notice), any enforcement agent instructed to execute against the assets of the company and any person that has distrained against the assets of the company.
The contents of the notice of intention are prescribed. Depending on whether it is the company or the directors making the application, the notice of intention must be accompanied, respectively, by a copy of the resolution of the company or a record of the decision of the directors. It must also be accompanied by a statutory declaration confirming that the company is likely to become unable to pay its debts, that it is not in liquidation and that there is, to the declarant's knowledge, nothing preventing the appointment of the administrator.
The person giving this notice must then file a copy of the notice of intention and a statutory declaration at court. An interim moratorium immediately becomes effective when the notice of intention is filed at court.
The appointment of the administrator can't be made after the expiry of more than 10 days after the notice of intention to appoint an administrator was filed at court. On the other hand, the appointment can't be made before all holders of qualifying floating charges have either consented to the appointment or the 5 days' notice period has expired with no reaction from them.
For the appointment of the administrator to become effective, the person making the appointment must file at court a notice of appointment, with prescribed contents, confirming that the person is entitled to make the administrator appointment and that as far as the person is aware the statutory declaration that accompanied the notice of intention to appoint the administrator is still correct. The notice of appointment must give the identity of the proposed administrator and must be accompanied by a statement of the administrator confirming that they consent to the appointment, that the purpose of the administration is reasonably likely to be achieved and giving other prescribed information. The administrator's appointment will be effective from the moment the court staff endorse the notice of appointment with the date, time and court seal.
One of the sealed copies must be delivered to the administrator, who must publish their appointment in the Gazette and may advertise it in any other manner as they think fit. The administrator must also deliver a notice of their appointment to various prescribed people including:
In England & Wales, the application can be made to, and the documents can be filed at, the High Court in London or the Chancery section of any District Registry. If the share capital of the company is £120,000 or less, the county court hearing centre with insolvency jurisdiction, which is the closest to where the company's registered office was situated in the 6 months immediately preceding the application can also be used. The court where the documents were filed will hear any applications and proceedings resulting from the company's administration.
In Northern Ireland the application and all papers must be filed with the High Court Chancery Division, Belfast.
An interim moratorium covers the period from when the administration application or the notice of intention to appoint an administrator has been issued until that appointment is effective or if that appointment doesn't happen until the application is dismissed or a prescribed time has lapsed without an administrator being appointed.
The aim of the interim moratorium is to prevent the purpose of the intended administration from being defeated by creditors' enforcement actions, before the administration can become effective. However, it is not as extensive as the statutory moratorium that becomes effective on administration. Although most enforcement actions against the company during this period require the consent of the court, some actions don't and can proceed unhindered, such as:
The statutory moratorium covers the period from when the appointment of the administrator is effective until the end of the administration.
The statutory moratorium protects the company against enforcement action in the following ways:
Effect on creditors
To enable the administration to achieve its purpose a statutory moratorium becomes effective as soon as the company is effectively in administration. This provides the company with protection against legal enforcement action allowing the administrator the space to take the necessary action in pursuit of the objective of the administration.
Some of the further protections resulting from the placing of a company in administration are:
Effect on the company and directors
While a company is in administration all of its communications whether in hard copy or electronic must reflect the fact that it is in administration.
While the company is in administration the directors have limited powers and they can't use any management powers that would interfere with the duties of the administrator, unless the administrator consents thereto.
Effect on employees
The administrator may within 14 days from their appointment adopt the employment contracts of those employees they wish to retain. The liability of the company in administration for the salary and wages so incurred from the date of administration will be paid as an expense of the administration before the administrator's own fees and any floating charge holder.
Where the administrator makes any employee redundant the company will be liable for any claims for compensation for unfair dismissal but these claims will rank with all the other unsecured claims.
Where the administrator transfers the business or part of the business as a going concern to a new owner the employees will automatically transfer to the new owner under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and will receive unfair dismissal protection.
The administrator must be a qualified insolvency practitioner and they act in the capacity of an officer of court irrespective of how they were appointed.
The administrator must remain independent in their administration of the company and must aim to benefit the creditors as a whole.
The administrator will take control of the company's property and they have all the necessary powers to manage the company's affairs to the full extent required to achieve the purpose of the administration. These powers include:
As soon as the administrator is appointed the administrator must send a notice (with prescribed contents) of their appointment to the company and publish it in the Gazette and any other publication they think appropriate for ensuring that it will come to creditors' attention. They must also get a list of all the company's creditors and send each a notice of their appointment where they have addresses available. Within 7 days of their appointment the administrator has to notify the Registrar of Companies of their appointment (and in Northern Ireland they also have a duty to notify the EJO).
The administrator can by notice (with prescribed contents) request an officer, founder or employee of the company to supply them with a statement of the company's affairs within 11 days of being requested to do so. This statement of affairs, verified by a statement of truth, must be in a prescribed form and has to provide:
The administrator must set out proposals in a statement of how they intend to deal with the administration in order to achieve its purpose. These proposals can include the following:
The administrator must, within 8 weeks calculated from the day the company entered administration, send copies of their statement of proposals (complying with the prescribed contents) to the Registrar of Companies, every creditor of whose claim they are aware and every member of the company whose address is available to them. In the last instance, instead of sending copies of the proposal documents, the administrator may instead send a notice to the members of the company to tell them that the administrator will, on request, provide copies of the proposals free of charge.
Creditors' consideration of the proposals
The administrator must, within the period of 10 weeks from the date of the company entering administration, get a decision, by way of the deemed consent procedure or a qualifying consent procedure, from the company's creditors regarding their approval of the proposals made.
The administrator however need not seek the creditors' consent if:
However, even where there is no obligation on the administrator to get a decision form the creditors, they will still have to do so if it is requested, within a prescribed period, by creditors of the company that represent at least 10% of the total debt.
Approval of proposals
The creditors may approve the proposals, either as is or with modifications. The administrator has to consent to any changes the creditors want to make. The administrator has to report the outcome of the initial creditors' decision to the court, the Registrar of Companies and any such other persons as may be prescribed.
Where the initial creditors' decision approved the administrator's proposals and subsequent thereto the administrator proposes substantial revisions to the proposals they have to get the creditors' approval of the revised proposal. The administrator will do this by sending a copy of the proposed revision to each creditor and member of the company. In the case of the copy to the members, the administrator may again instead send a notice that it will be provided free of charge on request. The proposals will be approved, either as is or with modifications.
The administrator has to report the outcome of the further creditors' decision to the court, the Registrar of Companies and any such other persons as may be prescribed.
If the administrator reports to the court that the creditors have rejected the administrators' proposals, the court can do any of the following:
A creditor can establish a creditors' committee to carry out specified functions on behalf of the creditors. The committee can give the administrator at least 7 days' notice to provide information to them about the exercise of their functions.
The administrator has a duty to keep the Registrar of Companies informed of the progress of the administration by way of regular reports.
The administrator must also send progress reports to each creditor on a 6-monthly basis. These reports must contain information about the assets realised, the proceeds recovered and any payments made during the reporting period.
Ending the administration
A company's administration will end automatically after one year unless it is extended with the consent of the creditors or on application to the court. The administration can however also end at any time on application to court by the administrator or a creditor. If the court makes an order for the administration to end the administrator has to notify the Registrar of Companies.
Where the administration was started by an out-of-court process the administrator can end the administration when the purposes of it has been achieved by filing a prescribed form at court and providing within 5 days a copy of it to all the creditors of the company.
Administration is often used to gain the benefit of an interim moratorium while the required steps are taken to put a(CVA) in place. When the CVA is eventually approved the administration will end.
If the company is rescued and retained as a going concern by the administration, then the administrator will hand control of the company back to the directors when the administration ends.
If the company is not rescued as a going concern, the assets will either be distributed to the creditors by the administrators or the administration will be followed by a liquidation ending in both cases with the dissolution of the company.
Where an administrator ceases to act in that capacity for any reason they are discharged from liability in respect of any action of theirs as administrator.
When the discharge however becomes effective depends on how the appointment was made in the first place, except if the administrator dies in office. In the latter event the discharge becomes effective on the filing of the death notice at court. If the administrator was appointed in an out-of-court procedure by either the holder of a qualifying floating charge or by the company or directors the administrator's discharge from liability will take effect:
A discharge from liability does not however prevent the court from making an order against the discharged administrator on the application of the official receiver, new administrator of the company, liquidator of the company, a creditor of the company or a contributory of the company, alleging that the discharged administrator is guilty of misconduct, as specified in the Insolvency Act (or in Northern Ireland The Insolvency Order) in the handling of the money or property of the company.