Administration is an insolvency procedure introduced by IA 1986. It has been the most common and important insolvency procedure since 2003 but this is unlikely to remain the case now that the CIGA 2020 has introduced the new preinsolvency moratorium. That said, if a company enters into a formal insolvency procedure, it will probably enter into administration first and that will possibly be followed by a restructuring plan, a CVA, scheme or a liquidation.
A very important feature of administration is the creation of a moratorium which continues throughout the period of the administration. This provides the company in administration with a breathing space to achieve the purpose of the administration, as the moratorium prevents creditors without court or administrator consent from exercising their usual rights and remedies e.g. the right to enforce their security or in the case of a landlord, from attempting to terminate a lease by exercising a right of re-entry, or in the case of a creditor who has supplied goods on retention of title, from attempting to take possession of the goods to which it has title.
Administrators can be appointed either by court order or out of court (usually by directors or holders of “qualifying floating charges”). The methods of appointment are discussed below.
Qualifying Floating Charges
In practice the most important and common form of company security is a debenture which contains a floating charge and which, together with any fixed charge or other security, creates security over the whole or substantially the whole of the company’s assets. The debenture will usually include a provision giving the debenture holder (usually a bank) the right to appoint an administrator following the occurrence of an event of default under the loan agreement. This right is the central remedy available to a debenture holder to enforce its security.
The debenture holder has the right to appoint an administrator only if the floating charge created by its debenture is a Qualifying Floating Charge. This is defined in Schedule B1, paragraph 14 IA 1986 and includes a floating charge over the whole or substantially the whole of the company’s property (either alone or in conjunction with other security) and the charging document either states that paragraph 14 applies to the floating charge or purports to give the holder of the floating charge the right to appoint either an administrator or an administrative receiver (‘AR’). The holder of such a charge is called a Qualifying Floating Charge Holder (‘QFCH’).
A floating charge is a charge which, as created, was a floating charge and therefore includes any floating charge which has crystallised (i.e. converted into a fixed charge either as a matter of law or pursuant to the terms of the
debenture). It has the following characteristics:
- it is a charge over a class of assets of the debtor/chargor;
- the assets change from time to time in the ordinary course of the chargor’s business; and
- the chargor remains free to deal with those assets in the ordinary course of its business until crystallisation of the charge (e.g. on winding up or other event specified in the debenture).
Statutory purpose of an administration – Schedule B1, paragraph 3(1)
The EA 2002 introduced a single statutory purpose for appointing an administrator divided into three cascading objectives:
- The primary objective is the rescue of the company as a going concern.
- If (1) is not reasonably practicable or would not achieve a better result for the creditors as a whole, then the objective is achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration.
- If neither (1) nor (2) is reasonably practicable and provided an administrator does not unnecessarily harm the interests of the creditors as a whole, then the objective is realising property in order to make a distribution to one or more secured or preferential creditors.
It is the administrator who decides which of the objectives it will be reasonably practicable to achieve and his view might change as the administration proceeds. In practice, the first objective is only rarely achieved. Most administrations will have the second or third objective.
Going into administration
Who can apply to the court to appoint an administrator?
The following parties can apply to the court for an administration order:
- the company itself (i.e. acting with the authority of a resolution passed by the members in general meeting);
- the directors of the company (by board resolution);
- a creditor;
- the supervisor of a CVA; and
- a liquidator.
Who can use the out-of-court procedure to appoint an administrator?
- the directors of the company;
- a QFCH; and
- the company acting through its members.
Nowadays, the most common method for appointing administrators is a directors’ out-of-court appointment. This is true even if there is a QFCH as QFCHs often do not like the publicity associated with appointing administrators. That said, a QFCH will usually be able to influence the timing of a directors’ appointment. Appointments by the company (acting through the members) are very rare. Appointments by court order are fairly uncommon; the usual case when this happens is where a creditor has begun winding up proceedings against the company and the directors wish to appoint administrators before the court has made a winding up order. In this situation, the out-of-court appointment procedure is not available to the directors and they must apply to court for an order to appoint administrators. If the court makes an administration order, the pending winding up proceedings are automatically dismissed.
Note that where there is an outstanding winding-up petition, a QFCH may still use the out-of-court procedure to appoint an administrator, in which case the petition is automatically suspended.
The out-of-court procedure differs depending on who appoints the administrator. If a QFCH appoints the administrator, it files a notice of appointment at court and the appointment commences on the date of the filing (subject to serving notice on any prior QFCH). If the directors or the company appoint the administrator, then they must file notice of intention to appoint an administrator at the court and serve it on any QFCH, identifying the proposed administrator and giving the QFCH five days’ notice of its intention to file a notice of appointment with the court. The QFCH then may appoint its own choice of administrator within the five day period (assuming its security is enforceable and it has the right to appoint administrators at this point of time) or it will do nothing and will allow the directors to continue with the appointment process. The directors will do this by filing a notice of appointment with the court within a further five day window. The administrators are appointed immediately on the filing of the notice of appointment. It follows from this that the QFCH is usually able to override the directors’ or company’s choice of administrator. In practice (and as mentioned above), the appointment of an administrator usually takes place at a time decided upon by the QFCH and the QFCH will liaise with the directors when it is ready and request the directors to appoint the administrators which it has chosen. Where the directors do this, the appointment can take place very quickly and it is usually possible for the directors to file the notice of intention to appoint administrators, to obtain the consent of the QFCH to the appointment and then to file the notice of appointment within a few hours.
As mentioned above, a company cannot enter into administration if it has obtained a pre-insolvency moratorium unless the directors appoint the administrators.
Administration moratorium
The appointment of an administrator creates an immediate moratorium on certain creditor action whereby (except with consent of the court or the administrator in each case):
- no order or resolution to wind up the company can be made or passed;
- no administrative receiver of the company can be appointed;
- no steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;
- no legal proceedings, execution or other process can be commenced or continued against the company or its property, and
- a landlord cannot forfeit a lease of the company’s premises by means of peaceable re-entry.
There is also an interim moratorium if an application is made to court for the appointment of an administrator or a notice of intention to appoint the administrator is filed. Neither of these steps prevents a QFCH from appointing its own choice of administrator out-of-court (assuming its security is then enforceable and gives it the right to appoint an administrator).
The powers and duties of the administrator
Pending the appointment of an administrator, the directors remain in control of the company. They should merely preserve the company’s business and assets until the administrator is appointed and thereafter the administrator takes on the running of the business.
Note: following his appointment, an administrator must publicise his appointment and whilst the company is in administration, all business stationery must state that the company is in administration. The appointment of the administrators may adversely affect the company’s ability to enter into new contracts and/or obtain payment of outstanding invoices.
Duties
The administrator will run the company and its business with the aim of achieving the purpose of the administration. The directors are unable to exercise any management power without the consent of the administrator.
The administrator acts as agent of the company and incurs no personal liability on contracts he causes the company to enter into provided he acts within his powers.
The administrator is an officer of the court (even if appointed using the out-of-court procedure) and has a duty to the court and a duty to act in the interests of all the creditors.
Powers
Administrators have wide powers and these are set out in Schedule 1 to the IA 1986. An administrator’s powers include the power to carry on the business of the company, take possession and sell the property of the company, raise money on security and execute documents and deeds in the company’s name. As a general rule, administrators do not have the power to pay a dividend to unsecured creditors without obtaining court permission. They can pay a dividend to secured creditors out of the proceeds of the creditor’s security and can now (as result of the changes brought about by the Small Business Enterprise and Employment Act 2015) pay the prescribed part dividend to unsecured creditors out of the “prescribed part” (or ring-fenced) fund which we describe below. That aside, if there is a dividend to be paid to unsecured creditors, either the administrator will have to seek permission from the court to make the payment, or the administrator will propose a CVA or scheme on terms that he (acting as supervisor under the CVA) has the power to make dividend payments, or the administration will come to an end and liquidators (who will usually be the same individuals as the administrators) will be appointed to make the distribution.
The administrators’ appointment terminates automatically after 12 months. This period can be extended once by up to one year if the creditors agree. The court can also sanction any other extensions (which may be for more than one year).
The administrator (like a liquidator) has powers under the IA 1986 to apply to court and ask the court to make an order to set aside (avoid, or “claw back”) certain voidable transactions which occurred in defined periods before the start of the administration. They are known as “antecedent transactions”. One example is a transaction at an undervalue. These orders are sought with the aim of increasing the pool of the company’s assets available to creditors. Under the changes brought about by the Small Business, Enterprise and Employment Act 2015, administrators, like liquidators, now have the power to sue directors for wrongful or fraudulent trading.
Administrators can, in certain circumstances, bring the administration to an end without court involvement by filing the appropriate notice with the court. An example of when this procedure can be used is when an out-of-court appointed administrator believes that the purpose of the administration has been sufficiently achieved.
Pre-Pack Administrations
This term refers to the situation in which the administrator sells the business and assets of the company as a going concern very soon after his appointment. The terms of the sale agreement are negotiated and agreed before the administrators’ appointment and become immediately effective following the appointment. Pre-packaged sales have the advantage that the goodwill and continuity of the business are not damaged by the administration and certainty of result is achieved for the creditors.
Whilst these types of administration sales have been very common, some have argued that pre-packaged administration deals lead to a poor recovery for creditors as they are carried out without proper marketing of the assets and there is some doubt whether the administrators have satisfied their basic duty to sell the company’s assets at the best price reasonably obtainable. There is particular suspicion of pre-packaged sales where the buyer is a company owned by the directors or shareholders of the insolvent company. As such, pre-pack administrations have been controversial and in 2010 they were the subject of OFT calls for better regulation and transparency. The insolvency profession has responded to these calls and for some years, there has been more selfregulation imposed by relevant regulatory IP bodies and under these regulations (known as SIP 16) administrators must adhere to strict procedures reflecting best practise so that they can justify the price that is paid for the assets sold in a pre-packaged sale. Under the Small Business Enterprise and Employment Act 2015, there is a prospect that the relevant government department will receive enabling powers to make regulations prohibiting sales (including prepackaged sales) to connected companies unless certain conditions are fulfilled.