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Administration

Placing the company into administration is often considered the first course of action when a business has become insolvent.

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Administration is an insolvency procedure for companies (and LLPs) in financial difficulty. 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 can’t enforce their rights and remedies without the court’s or administrator’s consent (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, then the objective would be to ensure that creditors would recover more from the administration process than they would from a liquidation process.

Where neither is feasible, the objective should then be 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. 

Applying for a court order

The following parties can make an application to the court:

Out of court procedure

This is typically used by the business’ directors but can also be used by qualifying floating charge holders (QFCH) 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.

QFCH 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). 

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 to be 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 in a way that achieves the aim of administration. They are considered agents of the business and must act in the interests of the creditors. 

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

The administrator is also an officer of the court and owes a duty to the court.

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

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