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A Partnership Administration Order is similar in some ways to Administration for a limited company, but should not be confused with this or administrative receivership.
If a partnership is experiencing severe financial difficulties, is actually insolvent, or about to become insolvent, then it can be an option to consider. Typically there is an urgent need to deal with the problem as the business is running out of cash very quickly and needs protection. All of the partners must be solvent. Effectively the partnership administration is to protect the partnership whilst a restructuring, refinancing or sale is considered.
After drawing up a statement of affairs of the partnership, it is decided that the business is under real threat of being wound up by creditors or wrongfully trading.
The partners or one of the partnership creditors (this is rare) can petition to the court for an administration order. Typically, the partners are helped by an insolvency practitioner as an administrator who must be a licensed IP (insolvency practitioners are licensed by the DBIS and are heavily regulated).
At this stage the partnership obtains some protection from the Court in the form of a partial moratorium. It is unlikely that other legal actions can continue except with leave of the court. This application for an order stops creditors actions against the partnership (unless the court allows otherwise).
At the hearing the court considers the application and whether it should allow the court to grant powers to the administrator to run the partnership affairs. The court may then grant the order which gives full protection to the partnership a full moratorium providing all conditions are met and the rules observed.
Then the IP is appointed as administrator and effectively he/she takes control of the partnership affairs.
The Purpose of the Administration order
The admin order is granted only when the one of three options is being pursued.
- The proposal of a partnership voluntary arrangement
- Survival of all or part of the business as a going concern
- A more orderly realisation of assets than may happen in winding up (In other words avoidance of the meltdown of assets inevitable in liquidation)
In due course, but over the next 3 months (or longer if the court allows, but an application must be made for an extension) the IP must make proposals to the creditors and members of the partnership. A meeting will usually be called for the creditors to consider the administrators proposals. These are then implemented if approval is gained.
If survival or realisation is the aim then a simple majority of creditors need to vote in favour. If a PVA is being suggested then over 75% of creditors must vote in favour. (See a guide to partnership voluntary arrangements or guide to individual voluntary arrangements).
The benefits of Administration are;
- Protection of the partnership business from creditors for example those with writs, judgments, or winding up petitions.
- The IP is in control of the partnership business and has 3 months to examine the issues, work out solutions and come up with the best proposal for dealing with the insolvency.
- Where creditor pressure is mounting it prevents creditors pushing themselves up the insolvency ladder and collecting debt by using legal actions.
- It may maximise creditors interests as a whole
- If a partner becomes insolvent the individual partners creditors cannot then attack the partnership.
The risks or downsides are:
- As in administration of a company, the fact that a licensed IP is in control of the partnership inevitably leads to significant costs. As a consequence it is our contention that as a mechanism it is powerful but only really suitable for larger partnerships with larger assets and debts than most SME partnerships.
- All creditors and customers must know that the business is in administration all communications (such as letters, invoices, purchase orders etc) must state that the business is in administration).
- There must be sufficient liquidity for the partnership to trade through the administration process.
- Administration does not protect the individual partners estates. If they become personally insolvent because of the administration they can be personally attacked by their own individual creditors. (A solution may be to use SIMIVAs instead - click to read more about this).
- The partners lose control of the business.
Clearly such risks can be outweighed by the protection afforded by administration and the ability to fundamentally restructure the business such as removal of non performing parts of the business.
Without finance, however, (perhaps from the partners themselves) the administration may not be a viable proposition. It may be worth considering a PVA directly supported by IVAs or perhaps SIMIVAs.
This is a complex legal area so please call us and we can help: 08009700539 or 0207 8770050.