Insolvency

Administration is a procedure which allows a company breathing space to enable it to be rescued or restructured or that it allows for a better outcome than liquidation for its creditors.

The administrator of the company is an insolvency practitioner who has been appointed in accordance with the Insolvency Act 1986 (“IA 1986”) to manage the company’s business and property. The role of the administrator is to achieve one of the three purposes of administration, namely:

• To rescue the company as a going concern;
• To achieve a better result for the company’s creditors as a whole than would be likely to be achieved if the company were wound up; or
• To realise property in order to make a distribution to one or more secured or preferential creditors.

The company should not remain in administration if one of the three purposes is reasonably capable of being achieved. At this point the administrator must apply to the Court to end the administration.
A company should be in administration no longer than a year. However, if the administration is to last longer than this time then an application for an extension of time needs to be made to the Court. The application will need to show good reason for the extension (or for a first extension, the consent of the creditors for an additional six months).

The administrator of the company can be appointed either by the Court or using the out of Court procedure.

Out of Court appointment

In this instance the administrator can be appointed by:

• The Company;
• The directors of the company; or
• A qualified floating charge holder (“QFCH”).

The company or its directors can make an application under the out of Court process except when:

• A winding up petition has been presented and not yet heard. However, an administrator can be appointed if the notice of intention to appoint was filed prior to the winding up petition being presented;
• An administration application has been presented and has not yet been disposed; or
• There is an administrative receiver in office.

There must also be at least 12 months since the ending of a previous administration or a company voluntary arrangement.

If there is a QFCH and they have a valid floating charge over the whole or substantially the whole of the company’s property then they may make an application under the out of Court route. However, the QFCH must make an application to Court where:

• An administrator has already been proposed by the company or its directors;
• The company is already in a winding up, however, the application to Court can only be made if it the company was wound up by a creditors voluntary liquidation (“CVL”); and
• There is a provisional liquidator in place or an administrative receiver.

Should the out of Court appointment method be used then the process is laid out in the Insolvency Rules 1986 SI 1986/1925 (“IR 1986”). It is imperative that this process is closely followed otherwise the appointment is likely to be invalid. Should there be any doubt as to the validity of the appointment or the view that that the appointment may be challenged then it is sensible to instead proceed down the Court appointment route.

Court appointment

The appointment via Court can be made in much wider circumstances than those for an out of Court process. The parties that may make an application for the appointment of an administrator are:

• The directors;
• The company;
• One or more QFCH;
• An officer designated under section 87A of the Magistrates Court Act 1980;
• A combination of all of the above; or
• Other provisions within the IA 1986 or other statutes allow others to make the application.

Paragraph 21 of Schedule B1 of the IA 1986 enables the directors of the company to make an application for an out of Court administration. However, in some instances the permission of the Court is required, namely:

• A winding up petition has been presented and not yet heard. However, an administrator can be appointed if the notice of intention to appoint was filed prior to the winding up petition being presented;
• An administration application has been presented and has not yet been disposed; and
• There is an administrative receiver in office.

As is the case with an out of Court appointment of an administrator a QFCH must fulfil certain criteria prior to making an application to Court which must ascertain the validity of the qualifying floating charge. In addition to this a QFCH must make an application to appoint an administrator through the Court procedure if:

• There is a provisional liquidator in place or an administrative receiver;
• In certain circumstances there is already a liquidator in place; or
• If there is a current administration application by either the company or its directors and the QFCH wants to install their own administrator.

Effect of administration

Putting a company into administration allows it to take advantage of the statutory moratorium. This enables the company to have some breathing space which in turn allows for either a rescue or a restructure to take place without dealing with the immediate pressure from creditors. The moratorium is effective once the administration order comes into place. The moratorium applies to the insolvency proceedings and also other legal processes. It should be noted that there is also an interim moratorium upon the issuing or filing of the original administration application. This also provides for the dismissal of any winding up petitions which are pending. It also provides for the dismissal, in most cases, of any existing administrator or administrative receivership.

The administrator

The administrator of the company is an insolvency practitioner who has been appointed in accordance with the IA 1986 to manage the company’s business and property. The role of the administrator is to achieve one of the three purposes of administration. However, it is important to note that the administrator acts for all of the creditors not just those by whom they were appointed. Whether or not the administrator was appointed by the Court route or out of Court process they are still an officer of the Court.

Whilst acting as the administrator of a company they act as its agent. As such the administrator does not assume personal liability for any contracts that they enter into. However, for a robust approach the administrator will expressly state that the contracts are signed without personal liability for the them.
Pursuant to paragraph 100 (2) of Schedule B1 of the IA 1986 joint administrators can have specific roles and duties assigned to them including filing obligations and these must be set out clearly with any administration application. This is the case with the appointment route being conducted through the Court process or the out of Court process.

Irrespective of how the administrator is appointed their powers remain the same and it must be noted that these powers are extremely wide. It should be noted that although there are specific powers outlined in the IA 1986 they are not limited in scope.

The administrator can exercise all of the powers set out in schedule B1 of the IA 1986. However, they can also exercise all of the powers which are given to administrative receivers to enable them to achieve one of the three purposes of administration which is pursuant to schedule 1 of the IA 1986. Those powers are extremely wide and enable the administrator to do anything necessary to carry on the business and to realise the company property.

Although it is possible to either remove or replace an administrator, by either a creditor or company members application pursuant to paragraph 88 of Schedule B1 of the IA 1986, the Courts are reluctant to do so. This is because of the inevitable delays and increase in costs.

Ending the administration

The administration will come to an automatic end at the end of the 12 month period unless another exit has been taken. The other exits depend on the circumstances of the administration. However, other exits include either putting the company into liquidation, a company voluntary arrangement or moving to dissolve the company.

A pre-pack is where the sale of the business or assets has been arranged in advance of the company entering into administration. Therefore, once the administrator is appointed they will quickly complete the sale. As a result of this the company in administration would not need to incur the costs of trading and the associated costs.

Under a pre-pack the terms of sale are agreed before the administrator is appointed. However, where a pre-pack is agreed it is usually the case that the level of due diligence that has been conducted by the proposed buyer is less than that conducted during a standard corporate acquisition. The administrator will sell the assets sold as seen as not with the benefit of any warranties and guarantees. Should any be provided, which will be rare, then these will be extremely limited in scope.

Key characteristics of a pre-pack

Due to the nature of a pre-pack these are negotiated relatively quickly and completed within a short period of time.

As pre-packs are intended to be faster than the standard administration they are often less expensive and can provide a greater return to the creditors.

Because of the circumstances surrounding the pre-pack it is unlikely that the business will have been widely advertised due to the potential knock on effects to other stakeholders. Usually the sale is to the existing directors.

There must be formal independent valuations of the assets and goodwill of the business and it will be these valuations against which any offer needs to be made.

Although financing a pre-pack is key, it is imperative that existing suppliers are on board. If existing suppliers are not in agreement with the pre-pack then it is likely that the new company will fail.

Potential issues of a pre-pack

One of the main criticisms of pre-packs are that they are seen as done deals by the administrator and the existing management. This is because the new company will leave behind the liabilities from the company in administration and the new company is free to trade without those liabilities.

Because of the negativity surrounding pre-packs the Joint Insolvency Committee issued a new Statement of Insolvency Practice 16, often known as SIP 16. Under this the administrator is under a duty to provide certain information to creditors after the conclusion of the pre-pack sale.

Often a pre-pack is the company’s only option other than liquidation and therefore the Courts are usually supportive of pre-packs as long as they provide a better return to creditors than if the company simply went into liquidation.

However, a creditor who was unhappy with the pre-pack can challenge the sale. The challenge would be brought under the grounds that the administrator did not conduct their role properly and caused the creditor an unfair harm due to such conduct.

Considerations for the directors

Independent legal advice should by sought by the directors of the company if they are considering a pre-pack. This is because whilst they are considering a pre-pack sale they are under a duty to mitigate the company’s losses to its creditors. The directors also need to consider any potential liability issues for wrongful trading pursuant to section 214 of the IA 1986 and also with regards to any antecedent transactions pursuant to the IA 1986. The directors would also need to be conscious of any potential liability issues due to the use of a prohibited name pursuant to section 216 of the IA 1986.

Costs of the pre-pack

The pre-administration costs are to be paid as an expense of the administration. Therefore the costs would be treated in the usual priority order in relation to administration expenses.