In the event that a business reaches a point where it defaults on its debts or liabilities, or it is likely it will not be able to, it will be considered insolvent. In reaction, creditors will likely bring court proceedings in order to recover sums owed to them, and directors, employees and shareholders will be faced with high degrees of uncertainty.
In order to place a temporary hold on creditors’ claims and explore prospects of rescuing the company, its managing members or shareholders can vote to place the business into administration. During this period, creditors’ claims will be temporarily suspended, and the company directors surrender control to third party administrators. Alongside the administrator group, an Insolvency Practitioner (IP) will be appointed to hold office during the administration process.
What is the process of entering administration?
There are three means of a company entering into administration:
- The shareholder body or board of directors may appoint external administrators to whom they voluntarily relinquish control.
- A qualifying creditor, such as a floating charge holder, may appoint administrators. In order to qualify, the floating charge must cover either the whole or a substantial part of the company’s property. An administrator appointed though such means is referred to as Administrative Receivership.
- A court order to enter administration and appoint administrators. Such orders are made at the court’s discretion.
Upon entering administration, creditors cannot seek to enforce claims without leave from the relevant court. Nor can the company be wound up, unless deemed by the Secretary of State to be in the public interest. The powers of the administrator are broad, and include the ability to set aside below-value or fraudulent transactions, and seek information from the Secretary of State regarding the directors’ backgrounds.
Within eight weeks of their appointment, the administrator will contact all known creditors of the company and provide proposals as to how the company can be managed in order to meet its debts and liabilities.
If at least 10% of creditors require it, a creditors’ meeting will be held. The purpose of such meetings is to vote on proposals made by the administrator. The creditors will usually appoint an Insolvency Practitioner upon entry into administration. Failing this, the Secretary of State will make an appointment.
What are the priorities of administration?
The primary objective of entering into administration is to rescue the business as a going concern, and, if this is not possible, secure the best outcome for the company’s creditors.
Rescuing the company as a going concern generally takes the form of two methods: (1) “pre-packaged” sale; or (2) sale on the open market.
Where insolvency is anticipated, a business can have assets professionally valued, before administrators are appointed, into a “pre-pack”. In many cases, the existing directors and shareholders will then purchase the company’s assets in pre-package form and create a new company.
Sale on the open market
If upon entering administration the sale of the company’s assets on the open market have the prospect of returning a profit, the administrators will place those assets on sale. If possible, this method is useful for drawing quick cash returns for creditors and for preserving employee contracts.
Employees and sale of business as a going concern
Where a business is successfully sold as a going concern, existing employees that are subsequently transferred to a new entity are safeguarded under the UK’s Transfer of Undertakings (Protection of Employment) regulations. If employees are made redundant, they are entitled to claim compensation from the National Insurance Fund.
Failure to rescue the business as a going concern
An administrative period will come to an end automatically after a one-year period, subject to agreement to extend by creditors or court granted extension. By this point, the administrators will make a determination whether the company can be rescued as a going concern, or if not, whether it has sufficient assets to pay secured creditors and funds to satisfy unsecured creditors through a Member or Creditors’ Voluntary Liquidation.
Where an agreement cannot be reached between the company and its creditors that will preserve the company as an ongoing concern, or enter voluntary liquidation, the company will be compulsorily liquidated in order for the assets to be sold off.
It remains in the interest of all parties to enter into an administration period prior to any liquidation phase, in order for losses to be limited and business operations amended with the view to reducing harm to shareholders and employees.
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The administration procedure, as a means of attempting to rescue a company, is in almost all cases advisable to enter into in order to best protect the financial interests of shareholders, directors, employees and creditors. If a company is forced into liquidation following a period of administration, the directors will be subject to investigation by the Insolvency Practitioner. Potential sanctions may include bans from future directorship.
The insolvency lawyers at Lewis Nedas have served a wide range of clients with their financial affairs during difficult times, including directors in insolvency and stakeholders such as banks, sponsors and landlords. We have provided expert advice on salvaging company prospects, including reorganising and restructuring of debts.