An Insolvent Administration Order
The Insolvency Act 1986, introduced for the first time, this legal process to protect a struggling company, (but one which has some hope of recovery), from its creditors, whilst a restructuring plan is formulated. The Administration process was significantly changed with the introduction of the Enterprise Act 2002, which allowed easier access to this process, for companies in financial or other difficulties
Company Administration may be sought by:
- the company itself
- its Directors/Partners
- one of its Creditors
- Or by the holder of a qualifying fixed and floating charge over the company’s assets, like a Bank for example-see Administrative Receivership
An Administration Order is useful when:
- Cash-flow pressures are intense, but there is still an underlying good business to protect and recover.
- Creditors are unwilling to agree informal arrangements and some are pursuing the company through legal process.
- The company is insolvent (either on a balance sheet, or a cash-flow basis) and the Directors are concerned about wrongful trading
Once an Administrator is appointed, the company is protected from action being taken by creditors. The company cannot be wound up without the court’s permission. The Administrator, an Insolvency Practitioner, will firstly act to stabilise the company and then work with the Directors/Management to develop a plan for the future.Meanwhile the company continues to trade and the plan is to achieve one of the following:
- Rescue the company as a going concern, or
- Achieve a better result for the company’s creditors, than would be likely if the company were to go through another Insolvency process, such as liquidation (without first being in Administration) or
- Sell company assets in order to make a distribution to the secured/preferential creditors.
Experience shows that there is likely to be some form of business continues after the Administration, whether that is within the existing company or a different company. The key cost to an Administration is where the business continues to trade during Administration, not only incurring its own operating costs but also the costs of the Administrators team.
This is one reason why the concept of a pre-packaged (pre-pack or phoenix) sale has developed. The pre-pack sale is where an “off-market” sale is lined up prior to the start of the Administration process and then an Administrator is appointed to conduct the sale. The ethics of pre-pack/phoenix have been questioned, especially where the sale of assets is to a “connected” party, rather than a third party. However it should be noted that such a sale, if conducted following the correct procedure, does not breach any of the legislative rules.
An Administration will last a maximum of 12 months, exceptionally extended to 15 months. At the end of the Administration Order the company could be:
- Enter a Company Voluntary Arrangement. (CVA) and continue trading.
- Sell its assets.
- Enter into liquidation.
- Be struck off (Dissolved)
When a company borrows money, the lender usually has some security over its assets to ensure the money is repaid. If the company does not keep to the terms of the loan, or suffers financial difficulties, the lender may appoint their own Administrative Receiver (an IP) However an Administrative Receiver can now only be appointed in relation to a charge created before September 2003.
The Administrative Receiver’s principal aim however, is to get back the money the company owes to the secured creditor. The Administrative Receiver may sell company assets individually, or the company as a going concern, to pay the secured creditor and the costs of the Receivership.
A company in Administrative Receivership is often said to be in Receivership.