Administration

Administration is an insolvency procedure for companies (and LLPs) in financial difficulty, set out in the Insolvency Act 1986. Administration is a rescue mechanism for insolvent companies (or LLPs) that allows them to carry on running their business. During the administration period, the business is run by an administrator. 

During administration, creditors cannot enforce their rights and remedies without the consent of the court or administrator (this is known as an ‘administration moratorium’). This provides the business with the time and resources to achieve the purpose of administration.

The primary purpose of administration is to rescue the business as a going concern (ie to allow the company or LLP to continue to operate as usual without the threat of liquidation).

If this isn’t possible, the objective is to ensure that creditors recover more from the administration process than they would from a liquidation process.

Where neither is feasible, the objective is to sell the business' assets in order to repay one or more secured creditors (ie a creditor holding a secured claim over a debtor's property) or preferential creditors (ie a creditor who has the right to payment before others). This process must not cause unnecessary harm to the interest of other creditors.

It’s up to the administrator to decide which of the above objectives to pursue. In most instances, the first objective is rarely achieved and administrators often select one of the latter two.

Administrators can be appointed either by a court order or during court proceedings. More than one administrator can be appointed and such joint administrators are often appointed for practical reasons.

Applying for a court order

The parties that can make an application to the court include:

• the company (upon receiving authorisation from its shareholders through the passing of a resolution in a general meeting) or LLP

• directors 

• a creditor (or multiple creditors)

• a liquidator

• the supervisor of a Company Voluntary Arrangement (CVA)

• a combination of the above

Out-of-court procedure

This is typically used by the company itself or the business’ directors but can also be used by qualifying floating charge holders (QFCHs) or the business itself (in rare circumstances).

The procedures differ depending on who is seeking to appoint the administrator.

For directors to appoint an administrator, they have to notify the QFCH 5 days before they file the notice of intention at the court. The notice must also be served on them. If the QFCH disagrees with the choice of administrator, they can appoint their own within the 5-day period. Once the notice of intention has been filed, directors can file a notice of appointment at the court within 5 days. 

QFCH can appoint an administrator by simply filing a notice of appointment at the court.

QFCHs are creditors that have been granted the right to appoint administrators. They hold a floating charge over all or nearly all of the business’ assets (either on its own or when combined with fixed charges). 

What are fixed and floating charges?

Fixed charges refer to security taken over particular assets of the business (eg printers and cars). The holder of a fixed charge has control over any dealings of that specific property. The business can’t sell the property without the holder’s consent. 

Floating charges refer to security taken over a class of assets that’s essential for the operation of the business (eg raw materials and finished products). Unlike property under fixed charges, the business is free to deal with these assets without seeking the holder’s permission. This remains the case until the charge is ‘crystallised’ (ie a specific event occurs, such as the winding-up of the company).

The administration moratorium suspends the rights of creditors to take specific actions except with the court’s or administrator’s permission. These include:

• making an application for an order or passing a resolution to wind up the business 

• enforcing their security over the business’ property or repossessing them 

• starting legal proceedings against the business or its property 

The moratorium is effective upon the appointment of the administrator.

The administrator must run the business to achieve the administration's aim. They are considered agents of the business and must act in the interests of the creditors. They are also an officer of the court and owe a duty to the court.

Directors are banned from exercising their management powers without the administrator’s consent. 

An administrator can:

• conduct the business of the business 

• sell the business’ property

• sign documents in the business’ name 

• pay secured creditors out of the proceeds generated by the sale of the creditors’ security

• pay unsecured creditors from funds exclusively reserved for them

• ask the court to cancel certain transactions (eg undervalued transactions) that occurred in defined periods before the start of administration 

• take action against directors for fraudulent or wrongful trading (ie allowing a company to trade when it cannot pay its debts)

• end the administration process by filing a notice at the court

What about joint administrators?

Joint administrators may have specific roles and duties which they can decide between themselves. The administrators’ functions and whether they are to be carried out by all or only some administrators must be clearly set out:

• when filing the administration application (for court appointments)

• in the notice of appointment (for out-of-court appointments)

Administration should not last longer than 12 months. In fact, the administration process will automatically come to an end after 12 months unless an extension is granted by the court or creditors or a different exit route is taken. The administrator should request an extension if they cannot complete their tasks in the 12-month administration period.

If an extension is sought from the creditors this can be for a maximum period of 6 months. All secured creditors must consent to the extension. Where there are unsecured creditors, consent must be sought from those whose debts add up to more than 50% of the unsecured liabilities (excluding creditors who don’t respond).

Ending administration

If the administrator believes that the administration's objective has been achieved or sufficiently achieved, they can take steps to end the administration. This involves:

• for court appointments - applying to the court to end the administration at a specific time

• for out-of-court appointments - filing a notice of outcome and a final progress report with the court and the registrar of companies. This should be sent to all known creditors within 5 business days

Other exit routes

What exit routes may be appropriate after administration will depend on the specifics of the situation. However, common exit routes include:

• a Creditors' Voluntary Liquidation (CVL) - tends to be appropriate where assets are available to distribute between creditors

• a CVA - is an agreement between the company and its creditors to put in place a timetable for repayment of debts

• a restructuring plan (also known as a ‘Part 26A restructuring plan’) - is a restructuring procedure for companies in financial difficulty

For more information read the Government’s guidance and Ask a lawyer if you have any questions about the administration process.