Administration of a company

What is an administration?

In contrast to liquidation, which ends with the termination of the company, an administration is an attempt to rescue the company as a going concern.

By putting a company in administration, a statutory moratorium automatically takes effect that stops and prevents all debt recovery actions against the company by its creditors. This may allow an administrator time to re-organise the business of the company or sell off parts or the whole of the company or to enter into a company voluntary arrangement, in an attempt to find the required funds to set up acceptable repayment of debts while keeping the company trading and avoiding liquidation.

The purpose of an administration

The main aim of administration should be to enable the company to continue as a going concern.

However, the administrator need not perform their functions in order to achieve the main aim if they believe:

• that it would not be reasonably practicable to retain the company as a going concern; or
• that getting the administration order as a precursor to winding up the company will give a better result for the creditors as a whole than if an administration did not precede the winding-up of the company, and that performing their functions to achieve this secondary goal would be better for the creditors as a whole than rescuing the company as a going concern.

If neither the main or secondary goal mentioned above is reasonably practicable the purpose of the administration may alternatively be to realise the property of the company to make payment to secured or preferential creditors, as long as that doesn't unnecessarily harm the interest of the creditors as a whole.

The administrator does not need to identify in advance which objective they intend to pursue.

Which companies can go into administration?

Administration is only possible if one of the following applies to the company:

• it is registered in England & Wales or Scotland under the Companies Act (or if applying in Northern Ireland any company registered under the Companies Act 2006 in Northern Ireland);
• it is incorporated in an EEA state; or
• it is not incorporated in any EEA State but it has its centre of main interest in a member state (other than Denmark) or in the UK.

Routes to administration

A person may be appointed administrator of a company by:

• an administration order of the court;
• the holder of a floating charge; or
• the company or its directors.

Administration by court order

Who can apply for an administration order?

Only the following people can apply to court for an administration order:

• the company;
• the company directors;
• one or more creditors of the company;
• a designated officer of a Magistrates court that has imposed a fine on the company where a warrant has shown that the company has insufficient assets to satisfy the amount due (In Northern Ireland a clerk of the petty session in exercise of the power conferred by Article 92A of the Magistrates Courts (NI) Order 1981, i.e. where a fine imposed on a company in a magistrate's court remains unpaid, or the Chief Clerk in the exercise of power conferred by section 35(4A) of the Criminal Justice Act (NI) 1945, i.e. where a fine imposed by a court other than the magistrates court remains unpaid);
• any combination of the people above; or
• a supervisor of a CVA.

When can the court make an administration order?

The court can only make an administration order if it is satisfied that the company is, or is likely to become, unable to pay its debts, and that the administration is reasonably likely to achieve the purpose of administration.

Application for administration order where company in liquidation

If the company is in voluntary liquidation, then only the liquidator of the company can apply to court for an administration order. If the company is in compulsory liquidation the liquidator or the holder of a qualifying floating charge may make an application to the court for an administration order. The court will on granting the administration order also make such orders as might be required to discharge any winding-up order and deal with the transition from liquidation to administration.

Court procedure for appointment of an administrator

The application to get the administration order is made by paying a fee and filing various documents, with prescribed content, at court. These documents include the administration application, a witness statement and a consent to act from every administrator proposed in the application.

The court will issue the application and give a date when the hearing will take place. An interim moratorium immediately becomes effective when the application is issued by the court.

As soon as possible after the application has been issued, the applicant must notify the following people by service on them of a sealed copy of the application:

• any person who is or may be entitled to or that has appointed an administrative receiver of the company;
• any floating charge holder that is or may be entitled to appoint an administrator of the company; and
• any other persons that may be prescribed, such as, the proposed administrator; the company (unless it is the company applying); if there is a winding up petition pending on the petitioner and provisional liquidator; any supervisor of a CVA relating to the company; any enforcement agent instructed to execute against the assets of the company; and any person that has distrained against the assets of the company.

At the hearing the court will make an administration order on the application if:

• it is satisfied that the company is or is likely to become unable to pay its debts; and
• that the administration order is reasonably likely to achieve the purpose of administration.

However, if the applicant is a qualifying floating charge holder the court only has to be satisfied of the last of these.

Administration by out-of-court procedure

Who can appoint an administrator?

Only the following people can put an administrator in control of a company without a court order:

• the company;
• the company directors; or
• the holder of a qualifying floating charge.

The out-of-court procedure can't be used where the company is in liquidation, or an administrative receiver or a fixed charge receiver is in office in respect of the company or where there is a pending winding-up petition.

Out-of-court procedure for appointment of an administrator by the company or directors

The company or directors will start the out-of-court procedure by giving any qualifying floating charge holder (QFCH) and any other person who may be entitled to appoint an administrative receiver of the company, at least 5 days' written notice of their intention to appoint an administrator. (The QFCH can at any time during the 5 days' written notice period appoint their own administrator to the company. It can't however prevent the company from going into administration.) Notice of intention must also be given to the company (unless it is the company giving the notice), any enforcement agent instructed to execute against the assets of the company and any person that has distrained against the assets of the company.

The contents of the notice of intention are prescribed. Depending on whether it is the company or the directors making the application, the notice of intention must be accompanied, respectively, by a copy of the resolution of the company or a record of the decision of the directors. It must also be accompanied by a statutory declaration confirming that the company is likely to become unable to pay its debts, that it is not in liquidation and that there is, to the declarant's knowledge, nothing preventing the appointment of the administrator.

The person giving this notice must then file a copy of the notice of intention and a statutory declaration at court. An interim moratorium immediately becomes effective when the notice of intention is filed at court.

The appointment of the administrator can't be made after the expiry of more than 10 days after the notice of intention to appoint an administrator was filed at court. On the other hand, the appointment can't be made before all holders of qualifying floating charges have either consented to the appointment or the 5 days' notice period has expired with no reaction from them.

For the appointment of the administrator to become effective, the person making the appointment must file at court a notice of appointment, with prescribed contents, confirming that the person is entitled to make the administrator appointment and that as far as the person is aware the statutory declaration that accompanied the notice of intention to appoint the administrator is still correct. The notice of appointment must give the identity of the proposed administrator and must be accompanied by a statement of the administrator confirming that they consent to the appointment, that the purpose of the administration is reasonably likely to be achieved and giving other prescribed information. The administrator's appointment will be effective from the moment the court staff endorse the notice of appointment with the date, time and court seal.

One of the sealed copies must be delivered to the administrator, who must publish their appointment in the Gazette and may advertise it in any other manner as they think fit. The administrator must also deliver a notice of their appointment to various prescribed people including:

• any receiver or administrator of the company;
• any petitioner that has a pending winding up petition regarding the company;
• any enforcement agent or officer charged with distress or other legal process against the company or its property; and
• any supervisor of a CVA.

Which court is used for administration order application and filing of notices?

In England & Wales, the application can be made to, and the documents can be filed at, the High Court in London or the Chancery section of any District Registry. If the share capital of the company is £120,000 or less, the county court hearing centre with insolvency jurisdiction, which is the closest to where the company's registered office was situated in the 6 months immediately preceding the application can also be used. The court where the documents were filed will hear any applications and proceedings resulting from the company's administration.

In Northern Ireland the application and all papers must be filed with the High Court Chancery Division, Belfast.

The interim moratorium

An interim moratorium covers the period from when the administration application or the notice of intention to appoint an administrator has been issued until that appointment is effective or if that appointment doesn't happen until the application is dismissed or a prescribed time has lapsed without an administrator being appointed.

The aim of the interim moratorium is to prevent the purpose of the intended administration from being defeated by creditors' enforcement actions, before the administration can become effective. However, it is not as extensive as the statutory moratorium that becomes effective on administration. Although most enforcement actions against the company during this period require the consent of the court, some actions don't and can proceed unhindered, such as:

• the appointment of an administrative receiver (where allowed in limited circumstances) by the holder of a qualifying floating charge and that administrative receiver proceeding to carry out their duties to the advantage of the creditor that appointed them;
• the appointment of an administrator by the holder of a qualifying floating charge; and
• in a few limited instances, the presentation of a petition for the winding-up of the company by the Secretary of State or the Financial Conduct Authority.

The statutory moratorium

The statutory moratorium covers the period from when the appointment of the administrator is effective until the end of the administration.

The statutory moratorium protects the company against enforcement action in the following ways:

• No resolution may be passed or court order may be granted for the winding-up of the company. Although, in a few limited instances the presentation of a petition for the winding-up of the company by the Secretary of State or the Financial Conduct Authority is allowed.
• No administrative receiver may be appointed for the company.
• The following actions may not be taken without the consent of the administrator or the consent of the court:
• no steps may be taken to enforce security held over the company's property;
• no repossession action may be taken in respect of hire-purchase goods in the company's possession;
• a landlord may not exercise the right of forfeiture by peaceable re-entry with regard to premises let to the company; and
• no other legal process may be started or continued with against any property of the company.

The effect of administration

Effect on creditors

To enable the administration to achieve its purpose a statutory moratorium becomes effective as soon as the company is effectively in administration. This provides the company with protection against legal enforcement action allowing the administrator the space to take the necessary action in pursuit of the objective of the administration.

Some of the further protections resulting from the placing of a company in administration are:

• With limited exceptions all petitions for the winding up of the company will be dismissed on the granting of the administration order and will be suspended where an administrator is appointed by the holder of a qualifying floating charge.
• Any administrative receiver of the company has to vacate office.
• If a receiver has been appointed over part of the company's assets they will have to vacate office at the request of the administrator.

Effect on the company and directors

While a company is in administration all of its communications whether in hard copy or electronic must reflect the fact that it is in administration.

While the company is in administration the directors have limited powers and they can't use any management powers that would interfere with the duties of the administrator, unless the administrator consents thereto.

Effect on employees

The administrator may within 14 days from their appointment adopt the employment contracts of those employees they wish to retain. The liability of the company in administration for the salary and wages so incurred from the date of administration will be paid as an expense of the administration before the administrator's own fees and any floating charge holder.

Where the administrator makes any employee redundant the company will be liable for any claims for compensation for unfair dismissal but these claims will rank with all the other unsecured claims.

Where the administrator transfers the business or part of the business as a going concern to a new owner the employees will automatically transfer to the new owner under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and will receive unfair dismissal protection.

The role of the administrator after appointment

The administrator must be a qualified insolvency practitioner and they act in the capacity of an officer of court irrespective of how they were appointed.

The administrator must remain independent in their administration of the company and must aim to benefit the creditors as a whole.

The administrator will take control of the company's property and they have all the necessary powers to manage the company's affairs to the full extent required to achieve the purpose of the administration. These powers include:

• selling assets of the company that are subject to a floating charge as if they aren't subject thereto, although the floating charge holder will have the same priority in respect of the proceeds of it as they had in respect of the assets;
• the obtaining of a court order to enable them to sell assets of the company that are subject to security (other than a floating charge) as if they were not subject to any security, although a minimum amount set by the court would need to be paid to the secured creditors after the sale of the assets;
• removing a director of the company;
• appointing a director of the company;
• calling meetings of members or creditors of the company;
• applying to court for directions relating to their functions as administrator;
• make distributions to secured and preferential creditors of the company;
• make distributions to unsecured creditors of the company with the consent of the court;
• to make any payment which is necessary or incidental to the performance of their functions;
• to set aside transactions by application to court where they believe them to be made at an undervalue; or made to defraud the creditors; or to represent extortionate credit transactions or preferences.

Process of administration

Initial notices

As soon as the administrator is appointed the administrator must send a notice (with prescribed contents) of their appointment to the company and publish it in the Gazette and any other publication they think appropriate for ensuring that it will come to creditors' attention. They must also get a list of all the company's creditors and send each a notice of their appointment where they have addresses available. Within 7 days of their appointment the administrator has to notify the Registrar of Companies of their appointment (and in Northern Ireland they also have a duty to notify the EJO).

The administrator can by notice (with prescribed contents) request an officer, founder or employee of the company to supply them with a statement of the company's affairs within 11 days of being requested to do so. This statement of affairs, verified by a statement of truth, must be in a prescribed form and has to provide:

• particulars of the company's property, debts and liabilities; and
• the names and addresses of the company's creditors and specify the security held by each and the date the security was granted.

Proposals

The administrator must set out proposals in a statement of how they intend to deal with the administration in order to achieve its purpose. These proposals can include the following:

• If they believe that the purpose of the administration can't be achieved, why they think so
• A proposal for a voluntary arrangement
• A proposal for a compromise

The administrator must, within 8 weeks calculated from the day the company entered administration, send copies of their statement of proposals (complying with the prescribed contents) to the Registrar of Companies, every creditor of whose claim they are aware and every member of the company whose address is available to them. In the last instance, instead of sending copies of the proposal documents, the administrator may instead send a notice to the members of the company to tell them that the administrator will, on request, provide copies of the proposals free of charge.

Creditors' consideration of the proposals

The administrator must, within the period of 10 weeks from the date of the company entering administration, get a decision, by way of the deemed consent procedure or a qualifying consent procedure, from the company's creditors regarding their approval of the proposals made.

The administrator however need not seek the creditors' consent if:

• the unsecured creditors will not be paid other than from any prescribed part;
• there will be sufficient funds in the company to pay all the creditors in full; or
• it is not possible to achieve the main or secondary purpose of the administration and therefore the administrator will realise the property of the company to make payment to secured or preferential creditors only.

However, even where there is no obligation on the administrator to get a decision form the creditors, they will still have to do so if it is requested, within a prescribed period, by creditors of the company that represent at least 10% of the total debt.

Approval of proposals

The creditors may approve the proposals, either as is or with modifications. The administrator has to consent to any changes the creditors want to make. The administrator has to report the outcome of the initial creditors' decision to the court, the Registrar of Companies and any such other persons as may be prescribed.

Where the initial creditors' decision approved the administrator's proposals and subsequent thereto the administrator proposes substantial revisions to the proposals they have to get the creditors' approval of the revised proposal. The administrator will do this by sending a copy of the proposed revision to each creditor and member of the company. In the case of the copy to the members, the administrator may again instead send a notice that it will be provided free of charge on request. The proposals will be approved, either as is or with modifications.

The administrator has to report the outcome of the further creditors' decision to the court, the Registrar of Companies and any such other persons as may be prescribed.

If the administrator reports to the court that the creditors have rejected the administrators' proposals, the court can do any of the following:

• Specify a date from when the administrator's appointment will cease to have effect
• Make an interim order
• Where a winding up petition was suspended because of the appointment of the administrator make an order on that petition
• Make any order the court thinks suitable or postpone the hearing

Creditors' committee

A creditor can establish a creditors' committee to carry out specified functions on behalf of the creditors. The committee can give the administrator at least 7 days' notice to provide information to them about the exercise of their functions.

Progress reports

The administrator has a duty to keep the Registrar of Companies informed of the progress of the administration by way of regular reports.

The administrator must also send progress reports to each creditor on a 6-monthly basis. These reports must contain information about the assets realised, the proceeds recovered and any payments made during the reporting period.

Ending the administration

A company's administration will end automatically after one year unless it is extended with the consent of the creditors or on application to the court. The administration can however also end at any time on application to court by the administrator or a creditor. If the court makes an order for the administration to end the administrator has to notify the Registrar of Companies.

Where the administration was started by an out-of-court process the administrator can end the administration when the purposes of it has been achieved by filing a prescribed form at court and providing within 5 days a copy of it to all the creditors of the company.

Administration is often used to gain the benefit of an interim moratorium while the required steps are taken to put a Company Voluntary Arrangement (CVA) in place. When the CVA is eventually approved the administration will end.

If the company is rescued and retained as a going concern by the administration, then the administrator will hand control of the company back to the directors when the administration ends.

If the company is not rescued as a going concern, the assets will either be distributed to the creditors by the administrators or the administration will be followed by a liquidation ending in both cases with the dissolution of the company.

Discharge from liability

Where an administrator ceases to act in that capacity for any reason they are discharged from liability in respect of any action of theirs as administrator.

When the discharge however becomes effective depends on how the appointment was made in the first place, except if the administrator dies in office. In the latter event the discharge becomes effective on the filing of the death notice at court. If the administrator was appointed in an out-of-court procedure by either the holder of a qualifying floating charge or by the company or directors the administrator's discharge from liability will take effect:

• at the time stated in a resolution passed by the creditor's committee or if there isn't one the decision of the creditors, if the administrator didn't state that the company wouldn't able to pay the unsecured creditors except from the prescribed part of the company's property; or
• at the time decided by the unsecured creditors, where the administrator stated that the company wouldn't be able to pay the unsecured creditors except from the prescribed part of the company's property.

A discharge from liability does not however prevent the court from making an order against the discharged administrator on the application of the official receiver, new administrator of the company, liquidator of the company, a creditor of the company or a contributory of the company, alleging that the discharged administrator is guilty of misconduct, as specified in the Insolvency Act (or in Northern Ireland The Insolvency Order) in the handling of the money or property of the company.