Corporate insolvency: Administration

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. For an overview of these procedures, contact our team of insolvency solicitors.

Administration is an insolvency procedure, the main aim of which is to rescue an insolvent business. Here, we explain the procedure and practical issues to be considered.

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.

The out-of-court route can be instigated by the company, 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). 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. These default events will be set out in the charge documents.

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. It is usually made by the directors or creditors.

What is the end result of administration?

Ideally, administration will result in the business being rescued and continuing to trade. However, in reality, the business is sometimes sold on to a new business and the remaining company is liquidated. A business and/or asset sale may be via a pre-pack administration.

Administration may also be used in conjunction with putting a company voluntary arrangement (a CVA) in place, as administration allows for a moratorium against proceedings being brought by creditors and provides the time to consider the arrangements without creditor pressure. 

What happens when a company goes into administration?

Moratorium

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.

Administrator

An administrator, who is a qualified insolvency practitioner, is appointed to manage the company, its business and 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 his 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 appointed by that creditor. 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. 

Purpose

There are three potential aims of administration, which are, in order of priority:

• To rescue the company as a going concern; or
• To result in a better return for creditors than would be achieved by winding-up the company; or
• To enable secured or preferential creditors to be repaid.

The administrator must aim to achieve one of these objectives in this order.

Process

The administrator will notify various people of their appointment, including 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 directors or officers of the company so its 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. A copy of the proposals will be sent to the creditors, Companies House and the shareholders. A creditors’ committee made up of creditor representatives may be set up if the company has several creditors. 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.

Administration timeline

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. Whether it does so will be at the decision of the administrator. 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.

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. Please see ‘Who gets paid first’ article for more detail.

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. Administration will end once the purpose for it 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 CVA has been put in place.

What happens to the directors when a company goes into administration?

The directors basically 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. 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 back in charge.

Following their appointment, the administrator will request a director or officer of the company to provide a detailed account of the company’s assets and liabilities, or a statement of affairs. 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. Further information can be found at Corporate insolvency: what are the options for your business?

When a company is in administration, what employee rights apply?

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. Our recent guide contains more details on your responsibilities to employees on insolvency.

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). For further information, please see Transferring Employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’).

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 amount.