Why Companies are placed into Administration
You can ask our solicitors online for advice on company administration using the question box on the front of our website or the following free legal advice guide may answer your questions.
A business will usually enter company administration when they are experiencing financial difficulty and are finding it increasingly difficult to pay their debts. Often when a company is on the verge of administration they will be facing serious problems with creditors. However, once they enter company administration it is protected by a document known as a moratorium which ensures that legal proceedings cannot be started against the company.
The idea behind this moratorium is to offer adequate safeguards for the business and prevent creditors commencing legal action while a suitable plan of action is developed in relation to the company’s finances and its current structure. The goal of company administration is to reach the best possible outcome for all parties. In 2002 the Enterprise Act was introduced which aimed to help businesses rather than liquidating or closing them down.
Company Administration Explained
Administration is a complex process which requires careful management. It usually involves the appointment of an individual who is the designated administrator. This is carried out under the Insolvency Act 1986 and the role of the administrator is to coordinate the affairs of the company.
There are strict rules about who can act as an administrator. An administrator can be appointed by:
- Obtaining an Administration Order issued by the Court
- Holding a relevant qualifying floating charge (typically this will be a lender)
- Through the company or its Directors
The Purpose of the Administrator
When an administrator is appointed they are acting as an officer of the court. In addition they will also be acting as an agent on behalf of the company. Once an administrator has been appointed they have certain rights and responsibilities and they can enter into contracts and assume day to day managerial responsibility of the company.
An administrator is tasked with rescuing the business as a going concern rather than closing the business down. This will offer much more favourable terms for creditors. If this is not a viable option however, the Administrator can sell property to assign the required funds to creditors.
Within an eight week period after the company has been placed into company administration, the Administrator must draft a statement which is issued to creditors, providing an outline of what the administration process aims to achieve or if administration is not possible, why this is the case. Creditors can then vote on the most favourable option.
An administrator is appointed for a period of 12 months. However, this period of time can be extended provided that the business obtains the necessary permissions from the court or creditors.
Routes into Company Administration
There are several ways in which a business can enter administration and they can do so after one of the following has happened:
Court Route – Following on from a formal court application and court hearing
Non- Court Route – Filing certain documents at the court
The various routes that are available for businesses will depend on certain elements.
Out of court is only an option for a holder of a qualifying floating charge, a company or its directors
The court route is only an option for a company or its directors or a creditor
Pursuing the Out of Court Route
If you wish to pursue the Out of Court Route and you fulfil the criteria outlined above, a floating charge holder can:
Appoint an administrator under a debenture issued after 15 September 2003. If a lender such as a bank holds a debenture before 15 September 2003 they can appoint an administrative receiver. There are certain criteria that must be fulfilled to be classed as a ‘Qualifying Floating Charge Holder’ (QFCH). Before you can appoint an administrator you must issue the holders of the Qualifying Floating Charge two business days notice at least outlining your intention to do so.
If there are multiple charges over company assets, the Qualifying Floating Charge Holder must file a notice of intention at the High Court. This will incur an administration fee.
Once the court has sealed the notice of intention, the business will be protected through an interim moratorium which will prevent any legal action by creditors of the business to seize assets to repay outstanding debts. An interim moratorium will last until such times that an Administrator is duly appointed.
Following on from the Administrators appointment, the Qualifying Floating Charge Holder then must file a notice of appointment in addition to several other documents with the court. The Administrator must act on behalf of all creditors rather than just a Qualifying Floating Charge Holder.
If an Administrator is appointed by a company or its directors, they must file particular documentation with the court. An Administration Order cannot be granted unless the Qualifying Charge Holder has been given at least five days notice of intention to appoint an Administrator by the Company or its Directors. If the Qualifying Charge Holders wish, they can appoint their own administrator.
If the business is dealing with ongoing insolvency procedures, the Company or its Directors may not be able to appoint an administrator.
Company Administration Court Route
The court route is a slightly different method of dealing with company administration and is often implemented by an unsecured creditor. A business cannot use the out of court route if it is subject to insolvency proceedings. Companies, Directors and Qualifying Floating Charge Holders will usually use the out of court route because it is more flexible and a cheaper route.
Once the required documents have been issued to the court, the court will establish a timeframe for the case. This will set a date for a court hearing. In the time leading up to the hearing, the company will be issued with a temporary moratorium.
A sealed copy of the application must be served on the relevant parties, in line with the guidance contained within the Insolvency Act 1986. This must be served in good time, at least five days prior to any court hearing. The applicant must then file an affidavit with the court which will confirm service.
During the hearing the court will review the case and determine what type of order they believe is most suitable for the business. They will carefully consider insolvency too. The court will only issue an Administration Order if they are satisfied that the company cannot pay its debts and the Administration Order is highly likely to achieve the intended goal of Administration.