Putting a company into administration - a detailed guide:
Administration is a mechanism designed to protect a company from its creditors while a restructuring plan is completed. This technique can be very powerful in situations where the company has a very aggressive creditor (s) and needs to protect itself from them whilst a rescue plan can be worked out. It is not the same as an administrative receivership. Read our guide below for details on how to put your company into administration
What are the key components of administration?
The company must be a reasonable size, have reasonably predictable cash flow and must be able to predict profitability. There must be an insolvent position or contingently insolvent position. The directors think that a hostile creditor will seriously affect the future trading possibilities, this is often a landlord or the Crown creditors.
The administration process requires a licensed insolvency practitioner (IP) to act as the administrator appointed by the court. The court appointed administrator takes over the management of the company and takes responsibility for restructuring the company or business.
If the company has little in the way of assets, poor cash flow and no future then creditors voluntary liquidation is probably more appropriate than administration.
There are two types of application to the High Court. There is the "without court order" appointment route for holders of qualifying floating charges, and companies/directors. This is quick and does not need a court application or hearing. However, sometimes it is still more appropriate to make the second type a more detailed application which asks for a court hearing.
Who can appoint an administrator?
Companies and directors can appoint an administrator quickly with the IP's guidance. This does not require a Court Order it requires a fax to be sent to the court with the appropriate forms. Clearly the IP must have done some research first to establish if the company is insolvent, whether it is appropriate to put the company into administration, what the process will involve, and the planned outcome. They also have to show that an administration will produce a "better result" than a liquidation.
Where a company is in liquidation, or in a CVA then the proposed administrator must obtain a court order.
No administration order will be granted unless the holders of all qualifying floating charges have been given 5 days clear notice of the company's or directors' intention to appoint an administrator.
The floating charge holder (usually a bank) will still retain the ability to step in and appoint their own choice of administrator if they so wish.
So, it's possible for the board to decide to appoint an administrator and have the bank refuse and appoint its own. However, experienced insolvency practitioners are unlikely to encounter much difficulty if they are recognised by the bank and there is a quality plan to protect the business.
How can the bank appoint an administrator?
Banks can appoint an administrator if they hold a qualifying floating charge, under debentures granted after 15th September 2003. If the bank holds an older debenture, it can appoint an administrative receiver. The banks have the right to appoint an administrator - but it should be pointed out that the administrator has a duty to act in the interests of all creditors not just on behalf of the bank/floating charge holders.
There must be one (or two) of three "objectives" for the administration:
In the application to the Court the proposed administrator must state what their main objective is of the following three:
- Company rescue, as a going concern, should be the primary objective. This usually means that the company proposes a Company Voluntary Arrangement or a scheme of arrangement.
1.1. See administration followed by CVA below also see flowchart administration followed by CVA
- If that is not possible (or if the second objective would clearly be better for the creditors as a whole), then the administrator can achieve a better result for the creditors than would be obtained through an immediate winding-up of the company, possibly by trading on for a while and selling the business as a going concern.
2.1. This means trying to sell the business for more than a liquidation would raise (see creditors voluntary liquidation).
- Only if neither of the first two objectives is possible, can the administrator utilize the third objective, which is to realise any property to make a distribution to secured and/or preferential creditors.
3.1. This means collecting and selling the assets for the best price to pay the bank.
In cases where speed is essential in making the appointment, the rules include a provision that will allow for filing a notice of appointment during times when the court is not open for business. Typically this is by fax. The following day the solicitor will go down to the court and get the notice filed and stamped.
The filing of such a notice will bring into effect an interim moratorium on insolvency proceedings and other legal processes being taken against the company.
In a moratorium, no one can "knock the company over" without the leave of the Court. When the Court has effectively ratified the administrator's appointment, this is unlikely! The Court will want to have as much information as possible to ensure that the application for administration is correct and appropriate.
The company can enter administration to be sold. This is an example of a typical scenario.
- A company is under severe pressure, creditors are circling, and there is the possibility of legal action.
- Directors decide to take advice from KSA Group or a similar firm and a decision is taken to protect the business and stop legal actions. The company is insolvent, but there is a viable business.
- The company meets with KSA advisors,who draw up a report on the options available. Looking at CVA, administrative receivership, administration, trade sale etc. The board believes that a sale could be achieved but the company needs to be protected.
- An administrator is appointed and he / she runs the business for a period of around 1-2 weeks.
- In that time the administrator markets the business under insolvency guidelines called Statement of Insolvency Practice 13. The administrator must be seen to market the business for sale.
- The administrator obtains valuations from a professional valuer for all of the assets, goodwill and so on.
- In an agreed period, the directors of the old company or "oldco" can buy the business provided the valuations are met and the administrator gets the best deal for the creditors.
- The new company or "Newco" is created. It has no debt, no creditor pressure, and it can take on leases.
- Generally TUPE applies and therefore all employees rights move across to "newco".
- The "oldco" is then liquidated
How long does the administration process last?
The process can generally only last for up to 1 year, although this can be extended by the consent of the creditors and/or by the court. The administrator is also required to do everything as soon as reasonably practicable. There is a time-limit of eight weeks for getting their proposals (details of what they intend to do with the company) out to creditors, and holding the initial creditors meeting. This can be extended by the creditors' consent and/or by the court. These proposals will include full details relating to the administrator's appointment, and the circumstances leading up to it, as well as exactly how the administrator proposes to achieve the purpose of administration - including details of how they anticipate the administration will end.
Statement of affairs:
Upon appointment, the administrator will require one or more of the current or former directors or company officers to provide them with a statement of the company's affairs. This is a prescribed form which details the company's assets and liabilities, including those assets that are subject to any fixed or floating charges. This can be difficult to produce. A copy of the statement of the company's affairs, or a summary of it, must be attached to the administrator's proposals. See above for the 3 different types of proposals. A copy of the proposals will also be filed with the registrar of companies to be placed on the company's public file. Interestingly though, where the information included in the statement of affairs is commercially sensitive, the administrator can apply to court to have the statement, or the relevant part of it, withheld. Included with each creditor's copy of the administrator's proposals will be an invitation to the initial creditors' meeting, at which the creditors vote on those proposals and whether to accept them.
The initial creditor's meeting must be held within 10 weeks of the date that the company entered administration, and the creditors must be given at least two weeks notice of the meeting, although these time-limits can be extended by the creditors and/or the court.
- The business of this meeting can be carried out by correspondence, although if 10% or more of the creditors (in value of their claims) demand a meeting, then the administrator is still required to call one.
- The proposals can be accepted (by a majority vote, measure in value of claims), modified and then ultimately accepted, or rejected. If the latter occurs, then the administrator is required to report that fact to the Court and seek further directions.
- Following the initial creditors' meeting, and any subsequent meeting of creditors, the administrator is required to send a report of the outcome of the meeting to the court and to the registrar of companies for filing on the company's public file.
- A creditors committee can be formed if the creditors require it. This must be between 3 and 5 people.
- The administrator then manages the company's affairs, business and property in accordance with the proposals that have been agreed by the creditors.
- They must send regular progress reports to the creditors, the Court and the registrar of companies covering each six-month period from the date that the company entered administration until the administration ends, or until he ceases to act.
- These reports will provide full details of the progress of the administration to date, including a receipts and payments account ( information on the amounts of cash that have been received and paid out) and any other relevant information for the creditors.
You will see the law surrounding administration is complex and very powerful for companies in distress.
But, do not appoint an administrator before calling us to discuss any questions you have. Once appointed, it's too late to change your mind!
As part of the procedures the administrators have to report to the creditors and file reports to Company House over a year period. For an example of a six month report and one year report please see below. After 6th April 2017, these reports are not mandatory and the creditors can 'opt-out' of receiving future correspondence.
6 Month report of administrators
Final Report into administrators
What are the disadvantages of administration?
- The directors are not in control of the business and an offer from a third party may lead to their removal as directors.
- Tax losses can be lost if no CVA is proposed.
- Another buyer may purchase the assets.
- It is a public event - all creditors and all correspondence (invoices, advice notes, orders, emails, websites, letters) must say XYZ Co Ltd (In administration). Most customers and suppliers will therefore become very aware of the insolvency.
- All orders must be ratified by the administrator or his staff.
- The directors have no powers to run the company.
- As soon as reasonably practicable after their appointment, the administrator must obtain details of the company's creditors and must notify the company and all of its creditors of his appointment. However this can also be an advantage, as it stops legal actions.
- The appointment must also be advertised in the London Gazette and in a relevant local or national newspaper - one that the administrator thinks is appropriate for ensuring that the appointment comes to the notice of the company's creditors.
- Clearly the bank can be forced into appointing their own administrator if it decides its position is going to be compromised by the proposed Administration of the company.
- Costs are often very high for this procedure therefore in our opinion it is only really suitable for larger companies where aggressive creditors threaten future viability.
- TUPE applies to the new company "newco" - in other words the "newco" cannot remove employees and must adopt their contracts. This can be a problem when planning how to cut costs in the new company. However, the law is very fluid in this area and so it is always advisable to get detailed legal advice on this subject.
- Financing trade and other supplies can be difficult unless adequate resources are available and or new funds can be introduced in the administration period.
What are the advantages of administration?
Administration can be a very useful and powerful tool for insolvency practitioners to control the company, banks, and creditors to ensure survival of the business.
- All legal actions are stayed by the process.
- It stops the financial position getting worse and the directors being put at further risk.
- It can be very quick and cost effective if an "administration pre pack" is used properly. (See below).
- All unsecured debt is removed.
- From the creditor's perspective, because a licensed insolvency practitioner is appointed to administer the company, it also ensures that the administrator considers all creditors' positions correctly.
- Protection from creditors can allow the administrator a reasonable time frame (the 8 week period) to negotiate a deal to achieve the objectives.This may include selling the company to protect jobs and economic activity.
- It is possible for the administrator to appoint directors or managers to run the company. With our vast turnaround experience this is often preferable to the administrator's staff. We are well versed in ensuring that the administrator works with turnaround advisors such as KSA. This means that we are involved in the management of the company to ensure professional and pragmatic management at a time when the company is under severe distress.
Types of administration procedure:
Administration followed by CVA
The company is protected by Court while the company and the administrator put together a plan for the company voluntary arrangement. See Administration followed by CVA Flowchart
If there is a risk of a creditor winding the company up or a landlord taking aggressive action then this is a powerful (but expensive) way of controlling them.
KSA Group believes that administration is unnecessary most of the time. Going straight to a CVA cuts out costs (fees) and reduces market awareness of the troubles.
Administration followed by "better result"
The company is protected by Court while the administrator runs the business for a while to see if anyone will buy it as a going concern.
Many of these administrations are glorified liquidations where the administrator does NOT have to get the bank's permission to take fees as he/she has to in liquidation!
However, this can be a powerful tool if the company has good parts of the business that can be sold to a new owner.
As this name implies in an administration pre packaged sale the board or a third party agrees with the proposed administrator to buy the assets/business of the insolvent company. See Administration followed by CVA Flowchart here
This is designed to reduce publicity and cut costs of a normal Administration.
When the plan is ready and a contract of purchase is drawn up, the company is quickly protected by the Court while the Administrator sells the business to the new owners.
This gets rid of debts, unwanted or onerous contracts and employees.
It's a very powerful, very quick technique (after the initial planning stages) and can be done over a weekend for example. But unsecured creditors usually see nothing in return and cannot understand how it is legal.
Call us if there are still unanswered questions - contact KSA Group Ltd on 08009700539 or 020 7887 2667
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.