Throughout the United Kingdom there are countless businesses but sometimes things go wrong and companies experience financial difficulty. This could be attributed to a number of reasons from poor management through to external factors which are beyond the control of the company. Sometimes businesses have the resources to ride out troubled times and rebuild but for others, the story is quite different. Often business administration is the only solution.
When a business is placed into administration it is commonly because they are struggling to pay their debts and there are serious demands placed on the business from creditors. When a business enters administration, it is protected by what is referred to as a moratorium so legal proceedings cannot begin against the company. The idea for this is so the company is suitably protected while an appropriate plan of action is developed or the affairs of the company are reorganised to offer creditors the most favourable outcome.
After the introduction of the Enterprise Act in 2002, the law surrounding company administration changed. Since this law was introduced, the primary purpose of administration is to facilitate recovery efforts rather than wind them up.
Administration is a process which involves the appointment of a designated individual under the Insolvency Act 1986 who will be responsible for managing the company’s affairs, property and business. An administrator can only be appointed:
- By an administration order issued by the court
- If they are the holder of a qualified floating charge, typically this is the bank
- By the directors or the company
An administrator, regardless of how they are appointed is acting as an officer of the court. They also act as an agent for the company and as such, they are authorised to sign contracts or oversee the day to day business management. Ultimately the role of the administrator is to rescue the business as a going concern, or achieve a more favourable result for the company’s creditors than if the business was simply closed down.
When both of these situations are not viable, the administrator can then sell property to ensure that creditors are paid.
Within 8 weeks of entering administration, the administrator is required to prepare and present a statement to creditors which will outline how they addressed the administrative process and explain why company administration is not suitable. Creditors will then make a vote as to what proposal they deem to be the most appropriate.
An administrator will be appointed for a period of one year, although this time can be extended at the discretion of the court and creditors.
There are two main routes of entering administration; court and non court. If you wish to go down the out of court avenue, you can only do so under certain conditions. The out of court route is only suitable for holders of qualifying floating charges, directors or a company.
Alternatively the court route is open to creditors, a company or its directors.
Opting for ‘Out of Court’ Administration
Where an appointment is made by a qualifying floating charge holder, an administrator can be appointed in line with a debenture which was granted after 15 September 2003. If a bank is a holder of a debenture before this time, it can appoint an administrative receiver.
There are certain qualification criteria that must be addressed for the qualifying floating charge holder to appoint an administrator. The holders of any senior qualifying floating charges must be issued with at least two days notice of intention. If the company has multiple senior qualifying floating charges in relation to its assets, a notice of intention must be filed at the High Court.
Once the Court has sealed the notice of intention, the company is protected under an interim moratorium. This means that any creditors of the company cannot instigate legal action against the company or its assets. An interim moratorium will be in place until the administrator is appointed.
After the Qualifying Floating Charge Holder has been appointed, they must file a notification of appointment accompanied with a series of other documents to the court.
Opting for ‘Court’ Route
Unsecured creditors often use the court route or the company may not be able to use the out of court route if it faces ongoing proceedings in relation to insolvency. Qualifying Floating Charge Holders, Companies and Directors prefer the out of court route because it is much cheaper and more flexible.
After relevant documents have been filed, the court will allocate a date for the hearing. During this time the company is issued with an interim moratorium.
A sealed copy of the application must then be served to the appropriate parties at least five days prior to the hearing.
During the hearing, the court will review the necessary documentation and they will issue the most suitable order for the company.
An administration order will only be granted if:
- There is a high chance that the company will be unable to pay its debts
- The Administration Order is likely to achieve Administration purposes
The law surrounding company administration is complex. Being in financial difficulty is not ideal for any business, but it can prove a much better option than the company going out of business. In some cases it is quite possible that the company can continue to operate. Although the previous owner will not be managing the business, this is a much better alternative for everyone involved with the company from customers to stakeholders.
Sometimes when a company goes into business administration, it can be acquired by a third party at a reduced price. Information about businesses who enter business administration are regularly published online allowing potential owners or investors to identify faltering businesses and step in to take them over.
Often the business can be taken in a completely new direction and in some instances, salvaged by the new owners of the company.
About the author:
This article was written by a member of the Expert Answers legal advice team and posted by Lloyd Barrett. Expert Answers provides online legal advice on all aspects of UK Law to users in the United Kingdom.