Administration is a corporate rescue process aimed at saving the company itself. However if a company cannot be saved, Administration may also be used to produce a better outcome for the creditors than Liquidation.
The Administration Process
Entering Administration is now a straightforward process, which can often be commenced in a matter of hours, without any Court hearing. It is generally the directors who decide to put the company into Administration and choose the Administrator, who has very wide powers.
Upon entering Administration, the company receives wide-ranging protection from creditor action, even from secured creditors. This protection is designed to provide the Administrator with breathing space to examine the company’s position and try to achieve the best outcome for all of the creditors.
Administration is not an ‘end’ in itself and it is necessary to employ an “exit route”. Being a flexible process, Administration can produce a variety of different outcomes, such as a Company Voluntary Arrangement (CVA), a Liquidation (Compulsory or Voluntary), or simply the dissolution of the company at the end of the Administration.
Occasionally, the process of Administration may return a company to solvency without the need to compromise its debts, in which case, the company is handed back to its directors by the Administrator.
The powers of an Administrator are wide ranging: he can dismiss or appoint directors, stop hire purchase creditors from repossessing their goods, and sell assets subject to bank security, if considered to be in the best interest of the creditors.
The Administrator must act in the interests of the creditors as a whole but with a view to saving the company, if possible. Usually he will need to reach some form of agreement with the creditors to compromise their debts if the company is to be saved.
The Administrator has to issue a report to the creditors and shareholders of the company within 8 weeks of his appointment, explaining what he considers to be the best way forward and how much money they are likely to receive.
The Administrator is also required to prepare a report on the conduct of the directors of the company.
Even if a company cannot not be saved, its core business may still be saleable. Such a sale can be negotiated by the Administrator during the course of his administration, although this will mean that he is responsible for the on-going trading operations in the meantime.
More commonly in the current climate, Administrators are using the “pre-pack” option.
The Pre-pack (or “pre-packaged administration”) is an arrangement whereby the sale of a company’s assets (often including its name and trading operations) is negotiated prior to the company being placed into Administration and then completed prior to the creditors becoming involved in the process.
The practice of pre-packs has been the cause of some disquiet amongst creditors, with claims that the lack of transparency and absence of creditor involvement has been abused.
A recent best practice directive, Statement of Insolvency Practice 16 (SIP16) has placed much higher obligations upon Insolvency Practitioners undertaking pre-pack work, providing for more thorough marketing and earlier disclosure to creditors than was previously the case.
A guide for unsecured creditors published by the Association of Business Recovery Professionals.
The official legal wording relating to Administrators Fees.
Guidance notes relating to Pre-packaged Sales in Administration published by the Association of Business Recovery Professionals.
A useful guide to Redundancy and Insolvency for Employees published by 'The Insolvency Service', a government agency.