Administration is an insolvency process that was first introduced by the Insolvency Act 1986 and designed to facilitate the rescue of a company or business.
For a company or partnership to enter into administration, it must be insolvent or about to become so and there must be a reasonable prospect of achieving on or more statutory purposes. These are as follows:
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 wound up (without first being in Administration) or
c) Realising property in order to make a distribution to one or more secured or preferential creditors.
An administrator may be appointed by administration order of the court, the holder of a qualifying floating charge, or agricultural charge in the case of a partnership (usually a bank or other finance provider), by the company or its directors or in the case of a partnership by the members / partners.
An administration order application may be made by the company, the directors of the company, the members/ partners of the partnership, one or more creditors of the company or the designated officer for a magistrate’s court. In practice however, unless there is a pending winding up petition against the company or partnership, the company, directors or partners usually adopt a simplified out of court procedure to appoint an administrator. This latter process is what is to be considered here.
In order to appoint an administrator using the out of court process, the applicant will file a Notice of intention to appoint an Administrator, in the court. The document is then sealed by the court and dated, with the time of filing endorsed on the notice. A sealed copy is returned to the applicant.
The effect of filing this document is to prevent any legal action being taken against the company including the issue of a winding up petition, for a period of ten working days.
The applicant must give the holders of qualifying floating charges or agricultural charges in the case of a partnership, at least five working days notice of his intention to appoint an administrator. During that notice period, the chargeholder may do one of three things: he can do nothing, in which case at the end of the notice period, the applicant may appoint an administrator; he can agree with the applicants administration strategy and choice of administrator or he can appoint his own administrator to carry out the applicant’s strategy or any other strategy, it is felt is appropriate.
In practice, notice is given to chargeholders immediately the sealed document is returned by the court and in a well planned administration, all chargeholders will have been advised of the applicant’s intentions beforehand and been a party to the strategy discussions. Often the chargeholder will waive his right to notice, if he agrees with the strategy and the appointment of the proposed administrator.
Once all chargeholders have agreed or the five day notice period has elapsed without any alternative appointment being indicated, the applicant is entitled to file a notice of appointment of administrator in the court and immediately this is dated and sealed, the administrator is appointed.
Once appointed, the administrator will set about implementing his strategy to achieve the intended statutory purposes referred to above.
If a rescue of the company is to be achieved, he will probably continue to trade the business, albeit at a temporarily reduced level, while he proposes a Company Voluntary Arrangement to the unsecured creditors.
If the company or partnership itself cannot be rescued, it may be possible to rescue the business and the administrator will continue to trade, while marketing the business with a view to selling it to another party as a going concern.
If neither of the above is an objective, the administrator may well have already been in discussions with either the existing management or an unconnected party to carry out a “pre-pack” sale, which will be completed almost as soon as he is appointed administrator.
The administrator is required to summon a meeting of creditors within eight weeks of his appointment, with the meeting taking place within ten weeks of his appointment. This meeting is to enable the creditors to approve or modify the administrator’s proposals for achieving the intended statutory purposes of the administration and to agree the manner in which he is to be remunerated.
The law provides for an administration to automatically come to an end twelve months after it began unless an application is made by the administrator to extend it.