What is administration?
Administration is one of the three main types of corporate insolvency procedure in the UK (alongside liquidation or company voluntary arrangements) and is intended to support business rescue. As with any insolvency procedure, the overarching aim is to act in the best interests of creditors.
In an administration, the running of an insolvent company's affairs, business and property are managed by an administrator, who is required by law to be a licensed insolvency practitioner.
A company's directors or its creditors may apply to court to place a company into administration if it is insolvent. A company is insolvent if it cannot pay its debts when they are due, or if its liabilities outweigh its assets.
While a company is in administration, creditors are prevented from taking any actions against it except with the permission of the court.
An administration is only ever a temporary state of affairs: in England and Wales, administrations have a statutory length of 12 months, although this can be extended if necessary with the agreement of creditors, or the permission of the court. They can also last for under 12 months if the administrator judges that there is no need for the administration to last any longer, provided that creditors agree.
What is the purpose of an administration?
There are three main statutory purposes of an administration:
- Rescuing the company as a going concern, or
- Achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration), or
- Realising property inorder to make a distribution to one or more secured or preferential creditors.
The administrator must perform their functions with the first of these objectives in mind, unless they think either:
- That it is not reasonably practicable to achieve that objective, or
- That the second objective would achieve a better result for the company's creditors as a whole.
The administrator may perform their functions with the third objective as the intended outcome only if:
- They think that it is not reasonably practicable to achieve either of the first two objectives, and
- They do not unnecessarily harm the interests of the creditors of the company as a whole.
Who oversees an administration?
Administrations are overseen by a licensed insolvency practitioner, acting as an 'administrator'.
The administrator will take over the duties and responsibilities previously held by the insolvent company's directors. Administrators are responsible to all creditors: they are not responsible to one particular creditor, and they are not responsible to the insolvent company's directors. The administrator's duty is to achieve the best possible outcome for the body of creditors as a whole.
An administrator's work is overseen by the court, creditors, and their regulator. You can find out more about how insolvency practitioners are regulated here.
What does the administrator do?
The administrator works quickly to get as accurate a picture as possible about the company's affairs: its bank accounts, its operations, its assets and liabilities. After gathering as much information as possible, the administrator will look into different ways to meet their statutory objectives, including whether the company can be restructured, whether parts of it can be sold to a different company, or whether the company can avoid liquidation.
Sometimes, an administrator can 'trade' a company in administration for several weeks or months as they look to find a buyer for the company or its business, or while they try to restructure the company.
The administrator will also pursue money owed to the insolvent company so that they can return this to creditors, too. This can include litigation and investigating whether any fraud has taken place.
The administrator will communicate with creditors and the court, and ensure they're kept up to date with developments on at least a six-monthly basis throughout the administration. The administrator will write to all known creditors within 14 days of their appointment and has up to ten weeks to provide creditors with a copy of their proposals for dealing with the company. Creditors will then vote on these proposals.
When the administration is terminated, a final report will also be produced. These reports can be accessed via Companies House.
Administrators can repay debts owed to secured creditors in administration, but they cannot make repayments to unsecured creditors unless these repayments are made as the 'Prescribed Part'. Repayments to unsecured creditors (outside of the Prescribed Part) can be made in liquidation or company voluntary arrangements or with the permission of the court.
Where repayments are made to creditors out of the company's assets, this is done according to a strict hierarchy set out by government. You can find details of this hierarchy here. The amount of money repaid to creditors depends on the value of the insolvent company's business and assets.
What happens at the end of an administration?
There are various scenarios which can come about at the end of an administration:
- The business is rescued:
- The whole business is sold to a new company, or the existing company receives fresh capital and continues trading;
- The company might restructure its business (cutting loss-making subsidiaries,reducing costs) and re-emerge from administration;
- Part of the business could be sold to new owners or moved to a new company - the old company and unsold parts of the business will then be liquidated.
- The company may go into liquidation, or may be dissolved if there are no funds for distribution to unsecured creditors.
- If a voluntary arrangement has been agreed during the administration, the arrangement may continue according to its terms (it is possible for a voluntary arrangement to run concurrently with an administration).
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