Company Administration

Introduction - the recent rise in the number of small companies going into Administration is largely been due to the worsening economic conditions. In particular, property investment companies, pubs, bars and clubs have been particularly badly affected.  As the buy to let landlord boom collapses have nervous consumers are tightening their belts, dependant businesses are suffering and some falling into administration. Most of these firms were larger companies but there is also a marked increase in the small and medium sized companies as well.  The amount of money poured into private equity funds linked to companies that facilitate business debt re-structuring is also increasing. One of the most widely used forms of corporate Insolvency is known as Administration....

What is Administration? - when this option is employed, the company is placed in the hands of an Administrator whose primary role it is to rescue and save the business from going into liquidation.  In practice, the Administrator is usually a licensed Insolvency Practitioner with experience in helping struggling businesses. The role of the Administrator is to have worked closely with the directors and managers of the company in order to work out a debt reorganisation plan and to ensure the business continues as a going concern. The underlying objective is to represents the interests of the creditors to ensure the survival of the company means that creditors debtor can be repaid and is more than would have been repaid had the company been wound up. This also means that any property must be realised to ensure that secured creditors and preferential creditors can retrieve unpaid debt.  The administrator (in most cases the insolvency practitioner), will work with the owners of the business in order to produce a Proposal which would be submitted it to the creditors. This proposal outlines of exactly how debt restructuring is to take place, including practical actions to minimise costs and increase sales potential.

The Administration Process -  as soon as is reasonably possible, the administrator must send a written notification of his appointment of up to the creditors of the company. This proposal must include of the rationale and objectives of the administration process. For instance, it may include an option for a Company Voluntary Arrangement. This statement or 'proposal', must reach every member of the company and all creditors (whose addresses and contact details are known to the administrator), within eight weeks. The proposal should include the details of the creditors' meeting and invitation for the creditors' to attend. The administrator must invite all creditors who are owed monies exceeding 10 per cent of the company's total debt. The proposal is then presented at the Creditors' Meeting who vote upon of whether or not to approve it. Each creditor's vote is directly proportional to the amount of debt the company owes the each creditor. 

Shareholder/ owners of the struggling company may or may not have get the opportunity to vote on the proposal (depending upon the decision of the administrator). Indeed, shareholders might also not be allowed to attend the creditors' meeting. Once approved, this proposal may take months or even years to be implemented in practice.  As a major shareholder, business owners can expect to lose the value of their shares, following the redistribution of assets by the Administrator. In practice, the shares may be exchanged for shares of lower value depending upon the circumstances. Typically in practice, the shares become worthless due to the indebtedness of the company. Prior to voting, creditors may choose to amend the proposal if they so wish. If a majority vote is passed by the creditors, then the proposal can be ratified by the Court. Following any possible modifications the proposal must be sent to the registrar of companies.  Ultimately, the court has the power to veto the decision of the Creditors' Committee if so required. The Court approved proposal forms the basis of Administration. 

How is the Administrator Appointed? - under the Insolvency Act 1986, an Administrator can either be appointed in the the following ways:-

• Appointment by the Court - a court will only initiate an administration order if it is satisfied that the company will not be able to pay its debts and that the order is likely to achieve its goals. The application for the order to the court, can be carried out by either of the creditors, the company or Directors. The applicant must notify all parties that the order has been applied for. Upon hearing of the application, the court may to a number of things:-

  • approve or dismiss the application

  • make an interim order

  • delay any proceedings using an adjournment

  • treated as a winding up petition

• Appointment by floating charge holder - an Administrator may also be appointed by the holder of a 'floating charge'. The floating chare holder must hold a debenture secured upon a substantial proportion of companies property assets. If an Administrative Receiver or Liquidator has already been appointed, then an Administrator may not be appointed.

• Appointment by The Company or Directors - this can only be achieved if at least five business days written notice has been provided to person(s) entitled to appoint an Administrative Receiver. A statutory declaration to the Court from the Company must be made, stating that the company cannot pay its debts and that it is not in liquidation.

Functions of the Administrator  - the main functions of the Administrator are as follows:-

• General Powers - the administrator can remove an existing Director of the company or appoint a new Director. Indeed, existing directors cannot exercise any 'management power' without the prior consent of the administrator. They also have the power of to call a creditors' meeting and receive clarification from a court regarding the extent of their powers.

• Creditor Distribution - the administrator can make distributions to secured or preferred creditors. Any distributions to other types of creditors will need prior written permission of the court.

• Charged Property - when first appointed, the administrator takes control and power of all property of the company. In addition, he may take action to sell property that is subject to a floating charge.

Impact of Administration on the Company - the immediate impact of administration is to generally nullifying other possible insolvency procedures. These include the dismissal of any pending winding up petitions and the immediate dismissal of any administrative receiver. The administrator must approve all the legal processes impacting the company (such repossession of hire purchase goods by creditors or a landlord exercising their right to forfeiture). However, following a reasonable period of time, creditors or members of the company may choose to apply to the court, claiming that the administrator may be damaging the financial interests of the company, or in some way acting unfairly.

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