There are various routes which can be taken if your business gets into financial difficulty, some of which are designed to rescue the company and/or business and others which return value to the company’s creditors and result in the winding-up and dissolution of the company and business. For an overview of these procedures, please see Corporate Insolvency: What Are The Options For Your Business?
Administration is an insolvency procedure which aims to rescue an insolvent company and/or its business. Here, we explain the procedure and practical issues to be considered.
- How does a company go into administration?
- What is the end result of administration?
- What happens when a company goes into administration?
- Administration timeline
- Can a company in administration still trade?
- Who gets paid first when a company goes into administration?
- How long can a company be in administration?
- What happens to the directors when a company goes into administration?
- When a company is in administration, what employee rights apply?
- How long does it take to appoint an administrator?
- How much does an administrator cost?
How does a company go into administration?
An insolvent company can be put into administration in one of two ways:
- By a court order; or
- By the out-of-court route, which is simpler but still involves certain documents being lodged at court.
The court order option has to be instigated by the company, its directors, any creditor or creditors of the company, a liquidator or the supervisor of a CVA who will make a formal application to court. It is usually made by the directors or creditors.
The out-of-court route can be begun by the company, its directors or someone who holds a floating charge over all or most of the company’s assets (otherwise known as a qualifying floating chargeholder). A qualifying floating chargeholder may begin the administration process if something has occurred that permits the enforcement of the floating charge, such as the company’s failure to make a loan repayment. These default events will be set out in the charge documents.
What is the end result of administration?
Ideally, administration will result in the company being rescued and continuing to trade in the future although, in reality, the company or business are often sold or liquidated. Administration may also be the first step towards putting a company voluntary arrangement (a CVA) in place as the moratorium (see What happens when a company goes into administration? below) provides the time to consider the arrangements.
What happens when a company goes into administration?
Once an application for administration has been made, the company’s creditors will be prevented from taking any action, including bringing legal proceedings, against the company or its assets. This is known as a moratorium and allows the company time to be rescued or to reorganise or realise its assets. If you are owed sums from a company which has been placed into administration, you should provide full details of your claim to the administrator as soon as possible.
An administrator, who will be a qualified insolvency practitioner, will be appointed to manage the company, its business and oversee the administration process. It is common for more than one administrator to be appointed in case one is unavailable at any point during the process. The administrator has wide-reaching powers in relation to managing the company, its assets and business. For example, the administrator can sell any of the assets or the business, carry on the business, enter into contracts or other arrangements on the company’s behalf, make employees redundant, dismiss directors and so on. While carrying out his powers, the administrator must act impartially, honourably, fairly and in good faith. An administrator is also obliged to act as quickly and efficiently as is reasonably practicable. They have a duty to act in the best interests of the creditors as a whole; an individual creditor cannot direct the administrator how to act. The administrator, as an agent of the company, will not be liable for any contracts that the company enters into during the administration process.
The aim of administration is, in order of priority, to rescue the company as a going concern, result in a better return for creditors than would be achieved by winding-up the company or result in secured or preferential creditors being repaid. The administrator must aim to achieve one of these objectives in this order. Although the aim of administration is to rescue the insolvent company or business, in reality the result is often the sale of the business, such as through a pre-pack administration, or the liquidation of the company.
The administrator will notify various people of their appointment, including the company’s creditors and Companies House and will place a notice in the London Gazette. They will then go on to request a statement of affairs from the directors or officers of the company so its financial position can be determined and considered. This statement is essentially a detailed account of the company’s assets and liabilities and a copy will be sent to Companies House. The administrator will then set out their proposals in relation to the company’s future for the creditors to consider and vote on. A copy of the proposals will be sent to the creditors, Companies House and the shareholders. A creditors’ committee made up of creditor representatives may be set up if the company has a number of creditors. Creditors will need to provide evidence of the debt owed to them in order to vote on the proposals and may request that the proposals be amended. Once the proposals have been approved, the administrator will inform everyone to whom the proposals were sent and the court. If the proposals are rejected, the administrator will inform the court and may request the court to give directions as to the next step. Creditor approval will not be required in some cases, such as if the company has enough assets to satisfy all debts or if the company does not have sufficient assets to repay the unsecured creditors. Twice-yearly progress reports will be sent to the creditors and Companies House by the administrator during the administration process. Please see Administration timeline below.
|Action||Relevant date (some time periods can be extended)|
|Moratorium begins||Date that company enters administration|
||As soon as reasonably practicable after appointment|
|Administrator notifies Companies House of his appointment||< 7 days after appointment|
|Administrator notifies relevant people that he requires a statement of affairs||As soon as reasonably practicable after appointment|
|Statement of affairs to be provided to administrator||< 11 days after receiving statement of affairs notice|
Administrator sends proposals to:
||< 8 weeks after appointment|
|Initial decision date for proposals||< 10 weeks after company enters administration|
If approved, administrator notifies:
Final progress report sent to:
||When administration ends|
Can a company in administration still trade?
Yes, a company in administration can still trade. Whether it does so will be at the decision of the administrator. Sometimes, trading continues while the administrator looks for potential buyers for the company’s assets and/or business.
It is worth bearing in mind however, that in an insolvency situation, certain transactions which have been entered into by the company may be set aside, such as where there has been a preference or the transaction was at an undervalue. Further information can be found at Corporate Insolvency: What Are The Options For Your Business?
If a company is in administration, all business documents and any websites of the company have to state that the company is being managed by the administrator.
Who gets paid first when a company goes into administration?
Secured creditors with a fixed charge will be the first to get paid when a company goes into administration. After payment of the administrator’s fees and expenses, preferential creditors, such as employees, will get paid next, followed by floating chargeholders, unsecured creditors and finally, shareholders. Please see ‘Who Gets Paid First In Insolvency?’ for more detail.
Any amounts which become due under contracts which the administrator has caused the company to enter into will be paid in priority to the administrator’s fees.
How long can a company be in administration?
A company can be in administration for up to one year, although this period can be, and often is, extended. Administration will end once the purpose for it has been fulfilled; this may be because the company has been rescued and is trading again, or because the assets have been distributed to creditors and the company is being dissolved or because a CVA has been put in place.
What happens to the directors when a company goes into administration?
The directors basically lose their management powers when a company goes into administration although they will not be removed as directors (unless the administrator chooses to do so). The administrator will manage the company and business during the process and the directors will not be involved unless the administrator allows them to be. In some cases, the administrator may permit the directors to keep some control. Business documents and any websites of the company need to state that the administrator is controlling the company during the administration process.
If the company is rescued and begins to trade again at the end of the administration process, the directors will be back in charge.
Following their appointment, the administrator will request a director or officer of the company to provide a detailed account of the company’s assets and liabilities, or a statement of affairs. This enables the administrator to determine the financial position of the company and decide on a course of action. It is a criminal offence not to provide this statement if requested.
Directors should also be aware that they could be convicted, held personally liable or disqualified from acting as a director if they have taken certain actions in relation to an insolvent company, such as engaging in wrongful or fraudulent trading. Further information can be found at Corporate Insolvency: What Are The Options For Your Business?
When a company is in administration, what employee rights apply?
Employee rights do still apply when a company is in administration and administration does not automatically result in the termination of any employment contracts. The administrator can choose to ‘adopt’ all or some of the employees’ contracts of employment but if not, they will put in place a formal redundancy process. ‘Adoption’ must take place within 14 days. Our recent guide contains more details on your responsibilities to employees on insolvency.
If the business is sold as a ‘going concern’, any adopted employment contracts will automatically move across to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). For further information, please see Transferring Employees under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’).
How long does it take to appoint an administrator?
The speed with which an administrator is appointed will vary depending on the route used to put the insolvent company into administration. It is common for the directors to decide to place the company into administration and given that this only requires their agreement at a board meeting, it can be achieved fairly swiftly. If a shareholders’ meeting is required or the formal court procedure is followed, the process will take longer.
It is possible for an administrator to be appointed within one day, which is obviously beneficial in terms of their being able to take control of the company, business and assets and the moratorium coming into effect (see What happens when a company goes into administration?).
How much does an administrator cost?
The cost of the administrator is not prescribed and so fees will vary depending on various factors, including the actions required to be taken by the administrator, the size and complexity of the organisation, the complexity of its financials and the number of creditors.
However, the Insolvency Act 1986 does provide that the administrator’s fees must be fixed:
- as a percentage of the value of the property with which the administrator has to deal;
- by reference to the time properly spent by the administrator and their staff in attending to the administration; or
- as a set amount,
and the creditors will need to agree the amount.