Administration is an insolvency procedure whereby an ailing company is able to be reorganised in such a way that it can primarily be “rescued as a going-concern” or secondarily have its assets realised in such a way that a better result could be achieved for its creditors than if the company were wound-up straight away.
There are various routes into administration:
- By Order of the Court – This is usually as a result of actions brought by members of the company who believe it is being mismanaged by its Directors or by a substantial creditor of a solvent company who does not want to embark down the winding up route.
- By a Qualifying Floating Charge Holder (QFCH) – In order to qualify, the floating charge must relate to the whole or substantially the whole of the company’s property and have the stated power to appoint administrators. For example, if a creditor holds debentures (or other charges) over all the company’s property then they may appoint an administrator over that company.
- By resolution of the Directors or members of the company – If the Directors, or a majority of members, are convinced that the company is (or is likely to be) unable to pay its debts then they can place the company into administration. This will require a ‘Notice of Intention to Appoint Administrators’ to be filed at court and given to any Qualifying Floating Charge Holder.
Benefits of Administration
Once a company has filed a Notice of Intention to Appoint Administrators then it has the benefit of an interim moratorium on any claims being brought against it by any disgruntled creditors who the company may be in arrears with.
Administrations are a technical process requiring the appointment of specialist Insolvency Practitioners, who will use the time afforded by the moratorium to take control of all the company’s property and assume all the powers of the board of directors in order to achieve the primary or secondary purpose as appropriate.
To the creditor or a member of a company that is placed into administration, the process offers a final opportunity of a return to profitability that could see the company freed from poor management or its business assets streamlined and reorganised such that it begins to flourish once again and provide a return on investment.
Drawbacks of Administration
However, Administrations do not always go as smoothly as intended. Insolvency Practitioners, appointed as administrators, are entitled to deduct their fees and charges as secured creditors in preference to any others in the ‘queue’. If an administration is not successful and the company in question is insolvent with very limited assets, this can mean that there will be very few assets to return to creditors and/or members at the end of the process.
The Moratorium on claims, while incredibly useful to the Administrators attempting to resuscitate the company, is open to be used abusively. The courts are very unlikely to allow any sort of claim that might prejudice the recovery of the company to circumvent the moratorium, which prevents those with genuine extant claims against a company in administration from seeking justice. This can be especially damaging if combined with the ‘Pre-Pack’ process detailed below.
The Administration is primarily concerned with rescuing the company as a going-concern or returning as much investment to the members and creditors as possible. In cases of poor management this is often a simple matter of reorganising the management structure of a company and guiding it back to profitability – but these examples are rare. More often the company being placed into administration is on its way to liquidation and the administration is just one further step on that journey.
As will be appreciated, a company, as a legal personality, is distinct from the business that it carries on. The latter consisting of the assets, the stock and real estate (for example) that a company may own in order to carry on its trading activities. Oftentimes, and especially with larger companies, the news of being placed into administration is catastrophic for a company’s reputation and the business it carries on. Creditors might lose confidence; suppliers lose faith and members might seek to sell off their shares as quickly as they can. In order to minimise the disruption, the company’s board may seek to appoint administrators while already having formulated a plan for how the company’s business assets might be sold off. This ‘pre-packaging’ cuts down on the amount of work that an administrator might have to do and crucially the amount of time that it would take to facilitate the sale of those assets being completed. In this way the company’s most profitable business assets can be quickly hived off and sold, in order to pay the company’s looming creditors and either return to profitable trading or facilitate its eventual dissolution.
Pre-Packs can be a very cost-effective way for a company with competent leadership to quickly and flexibly hive off and realise company assets in such a way to pay outstanding liabilities. New owners can be approached, under the cover of confidentiality, before the administration is even announced and sales can be completed very quickly after the appointment of administrators to facilitate an almost seamless transfer of the business that can result in minimal job cuts or losses to suppliers. Pre-Packs also offer an ability for a company with very limited funding to obtain the best possible price for its assets to try and make liquidation as profitable as possible for the remaining creditors and members.
Pre-Packs can be undertaken with very little oversight from members or unsecured creditors. This, coupled with the very limited time-frames, can result in the company’s business being sold at an under-value from what it may have achieved had the assets been sold with a wider marketing campaign on the open market.
Pre-Packs can stray into banned practices of phoenix companies and asset stripping. This can occur where the management of an embattled company transfers the same business to another ‘phoenix company’, that they also manage or own, to continue trading but while shedding the debts it had previously incurred. The entire administration and pre-pack process can also be used by business-partners, who hold Qualifying Floating Charges of the required form over the company, to use the administration procedure to oust other partners who they might seek to deprive of their share of the profits.
Administration is intended to be a process by which companies in dire straits are offered a route back to profitability. For larger companies the successful conclusion of this process will mean a great deal to the wider economy or a large number of unsecured creditors and investors. For smaller companies the process can offer a lifeline opportunity to restructure, but for many it is just another step on the pathway to insolvent liquidation. Pre-Packs offer the possibility of a near-instant panacea or a controversial second-chance for the failed company’s business. In all circumstances specialist advice, taken early on in a company’s misfortunes, can make all the difference.
Eldwick Law has specialist insolvency solicitors who can advise creditors, directors or any other member of a company that might be facing administration. That is especially relevant during these very testing times, with many companies going into administration as a result of the COVID-19 government imposed restrictions.
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