Administration

Administrations are designed to be a constructive way of trying to save a company's business, and aim to hold a business together whilst rescue plans are drawn up. Administrations also look to maximise asset realisations or put forward alternative procedures such as a CVA or a scheme of arrangement.

The administration procedure, introduced by the 1986 Insolvency Act, has undergone major changes as a result of the introduction of the 2002 Enterprise Act.

The biggest advantage of an administration is the period of moratorium (protection against legal action being taken against the company). The moratorium gives the company breathing space in which a rescue package can be put together and implemented - in the best interests of the company and its creditors.

The provisions of the Enterprise Act aim to improve the administration process. For example, the new rules allow an administration to begin without an application to court. The administration period is usually limited to 12 months during which the administrator, as an officer of the court, is required to carry out their functions as quickly as possible and seek a suitable exit route.

An application for an administration order can be made to court by either the company, the supervisor of a CVA, the directors or creditors of the company. However, it is more likely that the company or the directors will appoint an administrator without an application to court as this is the quickest route of entering administration. The applicant gives written notice of their intention to appoint an administrator to any floating charge holder. The floating charge holder has to be made aware of the intending appointment of an administrator whereby their consent may be necessary. Documents are filed at court and as long as no objection is raised by those notified, the administrator is appointed.

Once appointed, the administrator takes control of the day-to-day running of the company, whilst formulating proposals for achieving the objectives of the administration. He must present these proposals at a meeting of creditors to be held within ten weeks of his appointment.

Once in administration, the company is protected from creditors who cannot disturb the business or recover any assets, e.g. cars and buildings, without the administrator's or court's consent.

An administrator has a great deal of power concerning the continuation of employment for company employees and directors, in addition to entering into contracts on the company's behalf. He literally takes over running the entire company.

The administration may be followed by the rehabilitation of the company and its return to the control of its directors, a company voluntary arrangement, or liquidation.

In addition to a traditional administration, some businesses may prefer to look into arranging a pre-pack administration. A pre-pack administration can be used to enable the business and assets of the company to sold to either a new company (this can also be referred to as a newco or phoenix company) or to an existing company. The definition of a pre-pack administration means that an agreement has been entered into for the sale of the business whereby all valuations, due diligence, finance, etc has been arranged prior the appointment of an Insolvency Practitioner ("IP") who is to be the Administrator of the company. Upon the appointment of an Administrator the deal is effectively ratified without either shareholders or creditors consent. The sale allows for a seamless transaction so that the company can continue trading without any disruption to the customer base. A pre-pack sale usually allows the employees of the insolvent business to be transferred to the purchasing company without the need for any immediate redundancies.

Pre-packs are regulated through the issue of Statement of Insolvency Practice 16 ("SIP") which effectively is a code of practice that Insolvency Practitioners abide by. The SIP lays down details on how the Insolvency Practitioner should disclose to creditors details of the sale.

For more information on companies we have helped in these difficult situations, please click here.