There are various routes which can be taken if your business gets into financial difficulty, some of which are designed to rescue the company and/or business and others which return value to the company’s creditors and result in the winding-up and dissolution of the company and business.
Administration is an insolvency procedure, the main aim of which is to rescue an insolvent business. Here, our insolvency solicitors explain the procedure and practical issues to be considered.
- What does it mean when a company goes into administration?
- How does a company go into administration?
- Who can put a company into administration?
- Advantages of administration
- Company administration – What are the legal requirements?
- What happens when a company goes into administration?
- Administration Process
- Administration timeline
- Can a company in administration still trade?
- What happens to the directors when a company goes into administration?
- What happens to staff when a company goes into administration?
- Who gets paid first when a company goes into administration?
- How long can a company be in administration?
- How long does it take to appoint an administrator?
- How much does an administrator cost?
- How does administration come to an end?
- What is the end result of administration?
- Alternatives to administration
- How can we help?
What does it mean when a company goes into administration?
Administration is a formal insolvency process that an insolvent company enters with a view to either rescuing the business as a going concern, or providing for a better return for creditors than a liquidation.
The administrator takes control of the company from the directors. The primary obligation is to the company’s creditors, and all decisions taken are with this obligation in mind. They may recover the business and return the company to profit out of administration, or they may sell the business or part of as a going concern to achieve a higher return for creditors than a liquidation.
How does a company go into administration?
An insolvent company can be put into administration in one of two ways:
- by a court order; or
- by the out-of-court route, which is simpler but still involves documents being filed in court.
Who can put a company into administration?
The out-of-court route can be instigated by the company, or its directors or someone who holds a floating charge over all or most of the company’s assets (otherwise known as a qualifying floating chargeholder) if the company is insolvent. A qualifying floating chargeholder may begin the administration process if something has occurred that permits the enforcement of the floating charge, such as the company’s failure to make a loan repayment.
The court order option can be instigated by the company or its directors if the out of court route is not appropriate in the circumstances, or any creditor or creditors of the company, a liquidator, or the supervisor of a CVA. They must make a formal application to court to approve the administration.
Advantages of administration
The main advantage to an administration is that the business may be recovered and returned to a viable business once the administration has ended. If not, then the returns for creditors are likely to be better than in a liquidation, because often at least some of the business is often sold as a going concern, which will always achieve a better return than a liquidation break up sale. For example, often goodwill and branding are sold in administration sales, which can be lost on liquidation once the company has ceased trading.
Another significant advantage to administration is that from the date of administration a moratorium is put in place preventing creditors from taking proceedings against the company without permission of the administrator or the court. This gives the company breathing space to assess its future and to take steps to recover.
Company administration – What are the legal requirements?
Compliance and regulatory requirements
The administrator is an agent of the company rather than an officer of the company. As such, the administrator has duties under their own professional compliance regulations to act independently and for the benefit of the creditors as a whole of the company during the administration. The administrator also has a fiduciary duty while acting with in the company.
Who is responsible for ensuring legal compliance?
Directors remain responsible overall for the company, but it is the administrators as agents who will file all the necessary documents with Companies House and complete other compliance duties, such as filing tax returns, while they are appointed over the company.
Director and officer duties:
Directors are not removed from office and so their fiduciary duties to the company remain throughout the course of the administration.
What happens when a company goes into administration?
One of the main benefits of administration is that once an application for administration has been made, the company’s creditors will be prevented from taking any action, including bringing legal proceedings, against the company or its assets without the consent of the administrator, or the court. This is known as a moratorium and allows the company time to be rescued or to reorganise or realise its assets. If you are owed sums from a company which has been placed into administration, you should provide full details of your claim to the administrator as soon as possible.
An administrator, who is a qualified insolvency practitioner, is appointed to manage the company, its business and to oversee the administration process. It is common for more than one administrator to be appointed in case one is unavailable at any point during the process. The administrator has wide-reaching powers in relation to managing the company, its assets and business. For example, the administrator can sell any of the assets or the business, carry on the business, enter into contracts or other arrangements on the company’s behalf, make employees redundant, dismiss directors and so on. While carrying out their powers, the administrator must act impartially, honourably, fairly and in good faith. An administrator is also obliged to act as quickly and efficiently as is reasonably practicable. They have a duty to act in the best interests of the creditors as a whole, which means that an individual creditor cannot direct the administrator how to act even if they appointed the administrator. The administrator, as an agent of the company, will not be personally liable for any contracts that the company enters into during the administration process.
On appointment, the administrator will notify the company’s creditors and Companies House, and will place a notice in the London Gazette. They will obtain a statement of affairs from the company so the current financial position can be determined and considered. This statement is essentially a detailed account of the company’s assets and liabilities, and a copy will be sent to Companies House.
The administrator will then set out their proposals in relation to the company’s future for the creditors to consider and vote on. Creditors will need to provide evidence of the debt owed to them in order to vote on the proposals and may request that the proposals be amended.
Once the proposals have been approved, the administrator will inform everyone to whom the proposals were sent, and the court. If the proposals are rejected, the administrator will inform the court and may request the court to give directions as to the next step. Creditor approval will not be required in some cases, such as if the company has enough assets to satisfy all debts or if the company does not have sufficient assets to repay the unsecured creditors. Twice-yearly progress reports will be sent to the creditors and Companies House by the administrator during the administration process. Please see Administration timeline below.
|Action||Relevant date (some time periods can be extended)|
|Moratorium begins||Date that company enters administration|
|Administrator: notifies company and creditors and possibly others of his appointment publishes notice of his appointment in the London Gazette||As soon as reasonably practicable after appointment|
|Administrator notifies Companies House of his appointment||< 7 days after appointment|
|Administrator notifies relevant people that he requires a statement of affairs||As soon as reasonably practicable after appointment|
|Statement of affairs to be provided to administrator||< 11 days after receiving statement of affairs notice|
|Administrator sends proposals to: Companies House creditors shareholders||< 8 weeks after appointment|
|Initial decision date for proposals||< 10 weeks after company enters administration|
|If approved, administrator notifies: anyone in receipt of proposals court If not approved, administrator notifies court and may seek directions|
|Final progress report sent to: creditors Companies House||When administration ends|
Can a company in administration still trade?
Yes, a company in administration can still trade. Sometimes, trading continues while the administrator looks for potential buyers for the company’s assets and/or business. Continuing to trade can maintain goodwill and value.
If a company is in administration, all business documents and any websites of the company must state that the company is being managed by the administrator.
What happens to the directors when a company goes into administration?
The directors lose their management powers when a company goes into administration, although they will not be automatically removed as directors (unless the administrator chooses to do so), and their duties as directors remain throughout. The administrator will manage the company and business during the process and the directors will not be involved unless the administrator allows them to be. In some cases, the administrator may permit the directors to keep some control. Business documents and any websites of the company need to state that the administrator is controlling the company during the administration process.
If the company is rescued and begins to trade again at the end of the administration process, the directors will be put back in charge.
Following their appointment, the administrator will request the directors to cooperate in providing a detailed account of the company’s assets and liabilities. This enables the administrator to determine the financial position of the company and decide on a course of action. It is a criminal offence not to provide this statement if requested.
Directors should also be aware that they could be held personally liable or disqualified from acting as a director if they have taken certain actions in relation to an insolvent company, such as engaging in wrongful or fraudulent trading.
What happens to staff when a company goes into administration?
Employee rights do still apply when a company is in administration and administration does not automatically result in the termination of any employment contracts. The administrator can choose to ‘adopt’ all or some of the employees’ contracts of employment but if not, they will put in place a formal redundancy process. ‘Adoption’ must take place within 14 days.
If the business is sold as a ‘going concern’, any adopted employment contracts will automatically move across to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE).
Who gets paid first when a company goes into administration?
Secured creditors with a fixed charge will be the first to get paid. After payment of the administrator’s fees and expenses, preferential creditors, such as some employee claims, will get paid next, followed by floating charge holders, unsecured creditors and finally, shareholders.
Any amounts which become due under contracts which the administrator has caused the company to enter into will be paid in priority to the administrator’s fees.
How long can a company be in administration?
A company can be in administration for up to one year, although this period can be, and often is, extended if required.
How long does it take to appoint an administrator?
The speed with which an administrator is appointed will vary depending on the route used to put the insolvent company into administration. It is common for the directors to decide to place the company into administration, and given that this only requires their agreement at a board meeting, it can be achieved fairly swiftly. If a shareholders’ meeting is required or the formal court procedure is followed, the process will take longer.
It is possible for an administrator to be appointed within one day, which is obviously beneficial in terms of their being able to take control of the company, business and assets and the moratorium coming into effect.
How much does an administrator cost?
The cost of the administrator is not prescribed, and so fees will vary depending on various factors, including the actions required to be taken by the administrator, the size and complexity of the organisation, the complexity of its financials and the number of creditors.
However, the Insolvency Act 1986 does provide that the administrator’s fees must be fixed:
- as a percentage of the value of the property with which the administrator has to deal; or
- by reference to the time properly spent by the administrator and their staff in attending to the administration; or
- as a set amount.
The creditors will need to agree the way the fees will be set.
How does administration come to an end?
Administration will end once the purpose has been fulfilled; this may be because the company has been rescued and is trading again, or because the assets have been distributed to creditors and the company is being dissolved, or because a Company Voluntary Arrangement has been put in place.
What is the end result of administration?
Ideally, administration will result in the business being rescued and continuing to trade out of administration. However, in reality, the viable parts of the business are sometimes sold to a new business and the remaining company is liquidated. A business and/or asset sale may be done through a pre-pack administration
Alternatives to administration
There are various alternatives to administration for a company in financial difficulties. Often administration is compared to liquidation. Liquidation is a more permanent cessation of trade for a company, and it is not expected to recover from liquidation.
How can we help?
At Harper James our insolvency solicitors have many year’s experience working with companies and creditors in the field of administration. We also work with trusted professionals who act as administrators on a day to day basis. Together we can help you to assess your company’s situation and whether administration may be a suitable option for you. Speak to one of our advisors today about your options.