The relevant law governing corporate insolvency is contained in:
• The Insolvency Act 1986,
• The Insolvency Rules 1986
• The Insolvency Act 2000
• The Enterprise Act 2002
Together these provide four different options for companies which are insolvent or in financial difficulty.
The four different options are as follows:
Administration was introduced in the 1980s as an alternative to winding up. The process is used primarily in an attempt to rescue a company as a going concern. Administration may be instigated with or without a court hearing, although there are a number of formalities which must be complied with.
The Enterprise Act 2002 permits floating charge holders, companies, or their directors to appoint an administrator without petitioning the court. Appointed administrators must be licensed insolvency practitioners and once appointed, the administrator becomes an officer of the court, regardless of whether or not he has been appointed by the court.
Out of court appointment of administrator by holder of a floating charge
An administrator may be appointed to a company by the holder of a floating charge over the company’s property provided that the charge is enforceable at the time of the appointment. The holder is required to either produce written consent from, or give two business days’ written notice to the holder of any prior qualifying floating charge. This can only be done so long as there is no provisional liquidator or receiver in place already.
The charge holder must file a Notice of Appointment with the court which must contain a statutory declaration by the person making the appointment that:
1. The person is the holder of a qualifying floating charge over the company’s property
2. Each floating charge relied upon is enforceable at the date of the appointment and
3. That the appointment is in accordance with Sch B1 of the Insolvency Act 1986
The notice of appointment must identify the administrator and contain a letter of consent from him indicating that:
1. He consents to the appointment, and
2. That in his opinion the purpose of administration is reasonably likely to be achieved.
He must also include details of any prior professional relationships with the company to which he will be appointed administrator.
The court will then endorse the documents and return two copies to the applicant, one of which is for the administrator. The appointment takes effect once these criteria have been fulfilled.
Appointment by the court of an administrator at the instance of the qualifying floating charge holder
Appointment by a court may be necessary if there is a defect in the qualifying floating charge documentation, or perhaps where an administrator wants to provide evidence that he is properly appointed to a foreign judiciary.
The process is also often used where a creditor, the company or its directors have already applied to the court for appointment of their own administrator and the holder of the floating charger petitions the court to have his own administrator appointed.
Again, if the company is wound up by order of the court, the floating charge holder may petition the court for an administration order instead.
In the event that the company is already in receivership, the floating charge holder may only petition the court for an administration order if the receivership is flawed in some way, or by agreement with the floating charge holder who appointed the receiver.
Out of Court Appointment of administrator by company or directors
Para 22 of the Enterprise Act 2002 permits a company or its directors to appoint an administrator without court proceedings. It is not however permissible if any of the following apply:
a) The company has been in administration in the preceding 12 months
b) The company has been subject to a moratorium in respect of a failed creditors’ voluntary agreement in the preceding 12 months
c) There is already a pending winding up petition in process
d) An administration application has already been made to the court and is still to be disposed of
e) An administrative receiver has already been appointed.
Directors or companies must give five business days’ notice to any person holding a qualifying floating charge or their notice of intention to appoint an administrator. The notice must identify the proposed administrator and must be in the prescribed form. A copy of the notice must be lodged with the court and must include a declaration that:
1. The company is unable, or likely to be unable to pay its debts;
2. The company is not in liquidation; and
3. The appointment is not subject to one of the restrictions in para 23 as outlined above.
Floating charge holders may then agree to the appointment of the proposed administrator, or may put forward an alternative administrator. Failure to respond to the notice of intention to appoint an administrator will result in the company’s appointee taking office once the notice period has expired. If a charge holder proposes an alternative administrator, a moratorium will take effect immediately and this can only be lifted with leave of the court.
Appointment of an administrator by the court at the behest of a company, its directors or its creditors
This is the only option for appointment of an administrator by an unsecured creditor or by a non qualifying floating charger holder, although in practice many unsecured creditors will move directly for liquidation. The company itself, or the directors may also apply in this way, but the court must, in every instance, be satisfied that the company is, or is likely to be unable to pay its debts, and that the administration order is likely to achieve the purpose of administration.
The applicant will complete the relevant application form, along with the consent letter from the administrator described above signalling his consent to the appointment, disclosing any prior relationship with the company and stating that in his opinion the purpose of administration is likely to be achieved.
The applicant, unless he is a qualifying floating charge holder, must provide a statement outlining his belief in the company’s inability to pay its debts and an affidavit describing the company’s financial position.
Effect of Application for Administration
Where an application has been made to the court, but has not yet been granted or dismissed, a moratorium takes effect. This moratorium can only be lifted with the leave of the court. The effect of the moratorium is that creditors may not, without the permission of the court:
• Take steps to enforce any security over the company’s property
• Repossess goods in the company’s possession under a hire-purchase agreement
• Commence or continue any legal process against the company or its property, or
• Exercise a right of forfeiture in respect of premises let by the company
Powers of the court
The court may, on hearing an administration application:
• Make an administration order
• Dismiss the application
• Adjourn the hearing
• Make an interim order
• Treat the application as a winding-up order, or
• Make any other order it thinks appropriate
The order takes effect at the time appointed by the court, or, if no time is appointed, at the time the order is made.
Effect of administration
Once an administrator has been appointed, the moratorium applies and can only be over-ridden by leave of the court, or with the consent of the administrator. The purpose of a moratorium is to protect and preserve company’s assets with the aim of rescuing the company as a going concern.
Further, no winding up order may be made.
The Administration Process
Announcement of administrator and Publicity
The administrator must send notice of his appointment to the company and publish a notice of his appointment in the prescribed manner as soon as is reasonably practicable. Notice must also be sent to the Registrar of Companies within seven days of appointment and to the company’s creditors. All future business documentation form the company must state that the company is in administration
Statement of Affairs
The administrators require company directors and others involved in the company’s business to prepare a statement of affairs providing information on the company’s debtors, creditors, securities and any other useful information within 11 days of being asked to supply the information. Non co-operation may result in criminal penalties.
Powers of Administrator
The administrator will run the company with a view to achieving the purpose of administration. He has the power to do anything necessary for the management of the affairs, business and property of the company. His specific powers are set out in Sch B 1 1A 1986 and include the power to sell assets, borrow money, insure, bring and defend proceedings and appoint agents.
Duties of the Administrator
Para 3 (1) of the Enterprise Act 2002 requires that the administrator must act in accordance with the following hierarchical objectives:
1. To rescue the company as a going concern; or,
2. To achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without being in administration first; or,
3. To realise property in order to make a payment to one or more secured creditors.
If it appears that it is not reasonably practicable to rescue the company as a going concern, the administrator may pursue the other two objectives. In the event that only option (c) is feasible, the administrator may secure property and make distributions to secured creditors, subject to the proviso that he must not harm the interests of creditors of the company as a whole. He is bound to perform his duties as quickly and efficiently as is reasonable practicable.
The Administrator’s Proposals
The administrator is required to prepare proposals which satisfy at least one of the three objectives above and provide details and an explanation for these proposals. These must be sent to the Registrar of Companies, the shareholders and the company’s creditors as soon as is reasonably practicable, but within eight weeks of administration commencing. Rule 2.25 (1) specifies what should be included in the report, namely information about the company and its directors, an evaluation of the problems that led to administration, a list of the creditors, details on the administrators remuneration, details on how the administration process has been dealt with and explanation of the proposals put forward.
The administrator’s decision must be explained in his proposals and if a rescue under (a) is chosen, the administrator may recommend a company voluntary arrangement.
Creditors must then be invited to a Creditors Meeting to discuss the proposals put forward by the administrator. This should be held within 10 weeks of administration commencing. The only exceptions to this requirement are where:
- The creditors can be paid in full; or
- There are only funds available for secured creditors and for the prescribed part for the unsecured creditors; or
- Company rescue is not possible and administration would not produce better results for creditors than a winding up.
In the event of the above exceptions applying, creditors holing more than 10% of the company’s total debts may still demand a meeting if necessary.
The creditors may then approve the proposals without or without any modifications agreed to by the administrator. If the modifications are substantial, the administrator is required to call another meeting to have these approved.
Voting is by majority and must be communicated to the court. Rejection of the proposals by the creditors must be reported to the court and the court then has considerable discretion in disposing of the matter by means of a winding up order or removal of the administrator.
Fulfilling the Purpose of Administration
The following options are available as possible “exit routes” to achieve the purpose of administration:
The administrator’s proposal may include a proposed company voluntary agreement (CVA) under the Insolvency Act 1986 , these are commonly used in an effort to rescue the company
If the company cannot be rescued, the administrator may focus on realising the a better value for the company’s assets than would be likely on immediate liquidation
Where there are no funds available for the unsecured creditors, the administrator will realise the assets and make distributions to preferential and secured creditors and will organise the dissolution of the company
If funds are available for unsecured creditors, the company will be put into creditors voluntary liquidation and the administrator will divide and distribute what is left of the company’s assets.
If a rescue has been achieved by an out of court appointed administrator, the administrator will lodge the requisite form and a final progress report with the court and advise all creditors of this. Administration will then come to an end.
If a rescue is deemed impossible, the administrator will advise the court of this and apply for termination of the administration. Usually this would be followed by a petition for a winding up order.
The appointment of an administrator automatically ends 12 months after commencement, however it may be extended with the consent of the creditors, or by court order if necessary.