When a company is insolvent and facing serious threats from Creditors it may enter into Administration. Licensed insolvency Practitioners are appointed by either the company, the Directors, or by a direct application to the Court. During this process the company is protected from Creditor action.
WHAT IS ADMINISTRATION?
Administration is a process available to insolvent companies in order to provide protection from its Creditors whilst a plan outlining how to restructure or sell its business and assets is formulated. Protection from Creditors is particularly useful and necessary in a situation whereby a company is being proactively or aggressively pursued for payment of a debt from one or more of its Creditors. A common reason for a company to enter Administration is if Creditors are threatening or have issued a Winding up Petition or is otherwise being pursued aggressively through the Courts by Creditors.
Any legal action taken against a debtor company in Administration has to be approved by a Court order so the process provides a valuable measure of legal protection.
Any Creditor with a qualifying security can overrule any direct appointment of an Administrator chosen by Shareholders or Directors. In Layman’s terms, this means the secured Creditor’s choice of Administrator overturns the Directors or Shareholders choice.
The powers given to Administrators when a company enters Administration are wide-ranging and they effectively supersede those of any existing company controllers. The powers of the Directors cease and an Administrator has the power to appoint or remove directors. One of the Administrator’s duties is to send out Proposals for Creditor approval. The Proposals detail the purpose of the Administration and a plan of action for what the Administrator hopes to achieve for both the creditors and the company.
WHAT ARE THE ADVANTAGES OF ADMINISTRATION?
Administration is a highly useful procedure for company directors and Insolvency Practitioners that can, if required, ensure the survival of a business.
Some of the particular benefits of the process are:
- Entering Administration brings a halt to any legal proceedings being brought against a company.
- The financial position of a company is prevented from further decline. This not only gives protection for the core business but also reduces the risk of Directors opening themselves up to a potential wrongful trading action.
- The procedure is implemented by a Licensed Insolvency Practitioner that is subsequently appointed as Administrator. Any action taken by the Administrator is done by an Insolvency Practitioner under a strict code of conduct set out by the Insolvency Practitioner’s licensing body.
- The Administrator is duty-bound to work for the benefit of all Creditors (including unsecured) positions. This is where Administration differs from an Administrative Receivership where the Receivers need only answer to the charge holder who instructed them.
- The company can be restructured, giving the Administrator the opportunity to dispose of non-profitable parts of the business and sell the parts of the company that have value. Therefore, the business may continue trading and maintain employment for the employees. If staff need to be made redundant to ensure the commercial viability of the company, any associated redundancy costs will be paid for by the Government subject to TUPE conditions.
- If the current Directors do not want to continue with the responsibility, new Directors can be appointed to manage the company by the Administrators, although this is unusual.
WHAT ARE THE DISADVANTAGES OF ADMINISTRATION?
- Entering Administration means that Directors have to relinquish control of their company, and they could be made redundant if the business is sold to a 3rd party.
- Assets once owned by a company might be sold off to third parties.
- Administration is a process that, when instigated, becomes publicly available information. Most notably, all Creditors will be informed, and any correspondence including (but not limited to) the company website, emails and purchase orders must state that the company is in Administration.
- All purchase orders raised by the company must first be approved by the Administrator during the life of an Administration.
- When an Administrator is appointed, it must be advertised in the London Gazette and additionally in a local or national newspaper. The reason for adverting the Administration is so Creditors which are not listed in the statement of affairs are given a better chance of becoming aware of the Administration and can submit proof of debt to the Administrator in the event there is a monetary return to Creditors.
- Any Creditor that holds a qualifying floating charge (usually a factoring company or a bank) can appoint an Administrator of their choosing. Even if the Directors have a preference for which Insolvency Practitioners they would like to appoint if the charge holder does not feel comfortable with this choice they have the power to appoint one of their choosing.
- The costs associated with Administration can be high and can escalate very quickly if trading the company.
- If all the business and assets are sold either to the current owners/directors or a 3rdparty, then the current employees may be transferred to another entity under TUPE (Transfer of Undertaking) laws. This can cause problems especially if the company needs to cut employment costs to ensure future survival.
- When a company enters Administration suppliers are unlikely to provide new credit terms and existing lines of credit will be revoked. It can be challenging for to trade and operate as normal due to cash flow restraints. For the company to succeed there must be sufficient monetary resources or an introduction of funding during the Administration.
HOW LONG DOES THE ADMINISTRATION LAST?
The Administration process continues for up to one year but can take far less time depending on the particular circumstances in a given situation. There is also scope for the process to last longer, but this requires the consent of the Courts and/or the Creditors involved. It is the Administrator’s responsibility to conclude the administration as quickly as is reasonably possible. The Administrator has an eight-week limit to draft Proposals. The Proposals are effectively a plan of action, and the Administrator needs to distribute the Proposals to Creditors and seek Creditor approval. The eight-week timeframe can only be extended by the Court and/or Creditors.
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