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Administration Order

1. 1 Brief Overview

1. 1.1 Introduction

1. 1.1.1 The Enterprise Act 2002 (“the Act”) has paved the way to an increase in the number of Administrations.
2. 1.1.2 The administration process has become more streamlined and the requirements less onerous than had previously been the case.
3. 1.1.3 The principal aims of the legislation were to make the process more flexible and to allow companies in financial difficulties to be rescued.
4. 1.1.4 The whole process has been designed to be quicker and cheaper in order to open up the procedure to smaller companies and to encourage businesses to address financial problems at an earlier stage in order to enable a rescue to be achieved.
5. 1.1.5 To be more specific the Act allows a system of “out of Court” appointments to be made and provides a simpler means of exiting from Administration.
6. 1.1.6 In addition new restrictions have been introduced on the rights of floating chargeholders to appoint an Administrative Receiver. While in the short-term this will not spell the end of Receivership, the number of such appointments will decrease and eventually disappear.
7. 1.1.7 In addition timescales have also been reduced in order to ensure that the Administration process is undertaken as quickly and efficiently as reasonably possible.

1. 1.2 Objectives

1. 1.2.1 The Act has introduced three hierarchical objectives namely:-
   1. the rescue of the company as a going concern;
   2. a better result for creditors (as a whole) than would be achieved by an immediate winding up;
   3. The realisation of property in order to make a distribution to secured and/or preferential creditors.

1. 1.2.2 The Administrator is under an obligation to consider each of the objectives in turn and explain why he cannot achieve each of the preceding objectives if he has chosen objective (ii) or (iii) above. This highlights the principal aim of the Act i.e. the rescue of the company.

1. 1.2.3 The primary consideration will always be the rescue of the company in order to ensure that viable companies are preserved and jobs are safeguarded.

1. 1.2.4 The administrator should explain in his proposals to creditors why it is not reasonably practicable to pursue the first objective.

1. 1.2.5 The second objective may include the selling of the company as a going concern but should this objective not be viable and the third objective is pursued/adopted then the administrator must not act in such a way as to harm the interests of the unsecured creditors.

1. 1.3 Out of Court Orders.

1. 1.3.1 The Act introduced the concept of “without Court Order” appointments. This had not been the case under the old regime whereby an Administration Order could only be obtained via a relatively lengthy and costly application to the High Court.

1. 1.3.2 The process is quicker and while documents still require filing at Court, the process commences with the filing of the documents at the appropriate court and not after a High Court hearing.

1. 1.4 Floating Charge Holders

1. 1.4.1 The Act introduced the concept of “Qualifying Floating Charges”(“QFC’s”).

1. 1.4.2 The effect of the change is that holders of QFC’s generally cannot appoint Administrative Receivers (although there are important exceptions) but can appoint an Administrator out of Court.

1. 1.4.3 Holders of floating charges must give notice to prior floating charges allowing the senior holder the opportunity to decide on the appointee.

1. 1.4.4 The company or its directors may appoint an administrator through the out of Court option but the Qualifying Floating Charge holders (QFC”) are able to ratify or oppose the proposed appointee and nominate their own office holder.

1. 1.5 Distributions

1. 1.5.1 Previously administrators had no power to make distributions to creditors. The Act allows distributions to be made to secured and/or preferential creditors without the sanction of the Court. Payments to unsecured creditors do require the Court’s permission.

1. 1.6 Time limits

1. 1.6.1 The Act imposes a one year time limit for the duration of the administration although this may be extended by the Court and/or the creditors.

1. 1.6.2 Similarly the timing of the Initial Creditors’ Meeting (“ICM”) has been shortened from three months from appointment to ten weeks.

1. 1.7 Exit routes

1. 1.7.1 The Act now allows a company in administration to move either straight into Creditors’ Voluntary Liquidation (“CVL”) if a distribution to unsecured creditors is likely or alternatively into dissolution.

1. 1.8 Preferential Creditors

1. 1.8.1 With effect from 15th September 2003 the preferential status of Crown Debts was removed.

1. 1.8.2 The remaining preferential creditors relate to contributions to occupational pension schemes payable within the preceding three months, employees’ pay and accrued holiday pay within the preceding four months and the DTI standing in loco of the employees for redundancy and pay in lieu of notice.

1. 1.9 The Prescribed Part

1. 1.9.1 The Act introduced the concept of the Prescribed Part. This effectively dictates that the office holder must make available funds out of the company’s net property for the benefit of unsecured creditors. These funds are not available to the floating charge holder(s).

1. 1.9.2 The rule only applies to floating charges created after 15th September 2003 and only when the company is in liquidation, administration or there is a receiver or provisional liquidator in office.

1. 1.9.3 The rule is also subject to a de minimis threshold of currently £10,000 or the office holder believes that the cost of making a distribution would be disproportionate.

1. 1.10 Duties of the Administrator

1. 1.10.1 The Administrator is an officer of the Court even if not Court appointed.

1. 1.10.2 He must be fair and objective and owes a duty to the Court and the creditors as a whole. This is the principal difference to Administrative Receivership where the office holder’s duty is to the appointor.

1. 2 Appointment of the Administrator

1. 2.1 There are a number of ways in which an Administrator can be appointed which are considered below.

1. 2.2 Appointment by the Company or the Directors.

1. 2.2.1 Appointment can be made in this manner provided that:-
   1. no petition for the winding up of the company has been presented and has not yet been disposed of;
   2. no administrative receiver is in office;
   3. no administration application has been made and has not yet been disposed of;
   4. no moratorium within the preceding 12 months under Schedule A1 has ended with no voluntary arrangement being in force;
   5. no voluntary arrangement within the preceding 12 months has ended prematurely.

1. 2.2.2 A notice of intention to appoint an administrator is filed with the Court which provides the company with immediate protection (an “interim moratorium”) against any legal proceedings against the company.

1. 2.2.3 Notice must at the same time be given to any holders of a qualifying floating charge who then have five working days to assent or appoint their own nominee.

1. 2.2.4 The following documents are filed in Court:-
   1. notice of appointment;
   2. a statutory declaration showing that all conditions have been met;
   3. evidence that notice has been served on any QFC holder and their consent;
   4. Administrator’s statement.

1. 2.2.3 Notice must at the same time be given to any holders of a qualifying floating charge who then have five working days to assent or appoint their own nominee.

1. 2.2.5 The pre-conditions of (ii) above are that:-
   1. the company is or is likely to become unable to pay its debts;
   2. the company is not in liquidation;
   3. the appointment is not prevented under the conditions (detailed in 2.2.1 above) of the Act.

1. 2.2.6 The administrator’s statement includes:-
   1. his consent to act;
   2. his opinion that the purpose of the administration is reasonably likely to be achieved.

1. 2.2.7 If there is no QFC holder then the appointment commences on the filing of the above documents as there is no need to give notice of intention to appoint.

1. 2.3 Appointment by Court

1. 2.3.1 The requirement to produce a “Rule 2.2 report” has been abolished under the Act and the procedure simplified.

1. 2.3.2 Application to the Court is the only method whereby an appointment can be made by:-
   1. a creditor or group of creditors;
   2. a Supervisor of a CVA;
   3. the liquidator of the company;
   4. a provisional liquidator;
   5. the Financial Services Authority.

1. 2.3.3 The application is in a prescribed format and should detail the company’s financial position, details of any secured creditors and any outstanding insolvency proceedings. The purpose of the documents is to satisfy the Court that the company is or is likely to become unable to pay its debts.

1. 2.3.4 The proposed administrator must submit his written consent and a statement that the purpose of the administration is reasonable likely to be achieved.

1. 2.3.5 The documents must be served on:-
   1. anyone who has appointed an administrative receiver;
   2. anyone who is or may be entitled to appoint an administrative receiver;
   3. any holder of a QFC;
   4. the petitioner of any outstanding winding up resolution;
   5. any provisional liquidator;
   6. the supervisor of a CVA;
   7. the company;
   8. the person proposed as administrator.

1. 2.3.6 Notice of the application must also be given to any sheriff or other officer with an execution or other legal process against the company or its property and any person who has distrained.

1. 2.3.7 On the granting of the administration order any office holder in situ will be removed from office and any outstanding winding up petition will be dismissed.

1. 2.4 Appointment by a QFC holder

1. 2.4.1 Reference has been made to the concept of A QFC holder and this requires further explanation.

1. 2.4.2 The Act defines a QFC as a floating charge created by an instrument which states that paragraph 14 applies to it, or which purports to empower the holder to appoint an administrator or to make an appointment which would be the appointment of an administrative receiver.

1. 2.4.3 In addition it should be a debenture secured by fixed and floating charges or a floating charge or charges over the whole or substantially the whole of the company’s assets.

1. 2.4.4 Charges created prior to 15/9/03 will still have the power to appoint an administrative receiver but will also be able to appoint an administrator out of Court. Hence the concept of receivership has not been abolished but will only apply to pre 15/9/03 charges.

1. 2.4.5 The rationale behind the move to restrict the incidence of administrative receiverships (“AR’s”) was that such an appointment had the following drawbacks:-
   1. AR had in some cases been used without any real thought as to whether the company could trade out of its difficulties;
   2. There was no adequate remedy if the appointment was found to be unnecessary;
   3. There was no adequate incentive to maximise economic value on the sale of assets or property;
   4. The office holder had limited duties to creditors other than the appointor.

1. 2.4.6 Holders of QFC created after 15/9/03 are prohibited from appointing an administrative receiver. Creation for these purposes is defined as the date the company signed the charge instrument not when the monies were advanced.

1. 2.4.7 Holders of post 15/9/03 QFC’s could still appoint a receiver under the fixed charge which would have advantages to the lender in terms of control and the duty of the office holder but a fixed charge receiver can be removed by a subsequently appointed administrator.

1. 2.4.8 An administrator is now an officer of the Court regardless of the method of appointment. The Court will therefore have supervisory jurisdiction over administrators which is in marked contrast to the position of administrative receivers.

1. 2.4.9 A holder of an enforceable QFC can appoint an administrator by filing prescribed format documents in the Court. This option is available provided that:-
   1. the floating charge is enforceable;
   2. no provisional liquidator has been appointed;
   3. there is no administrative receiver in office.

1. 2.4.10 Any prior holders’ consent must be sought. The notice of appointment must be filed at Court together with a statutory declaration that the appointor holds an enforceable QFC and a statement from the administrator consenting to act and stating that the purpose of the administration is reasonably likely to be achieved.

1. 3 Duties of the administrator

1. 3.1 The administrator must undertake the following:-

1. 1. notify all known creditors of his appointment;
   2. advertise forthwith the appointment in the London Gazette and one relevant newspaper;
   3. require a Statement of Affairs to be submitted by one or more of the current or former directors of the company;
   4. send a copy of his proposals to all known creditors and members of the company as soon as practicable but at least within 8 weeks of appointment;
   5. send notice of appointment to the Registrar of Companies;
   6. hold an initial meeting of creditors (“ICM”) within 10 weeks of appointment unless the company can pay all creditors in full or there is insufficient property to enable a distribution to be made to unsecured creditors or neither the first or second statutory objective can be achieved;
   7. send a report on the outcome of the ICM to the creditors, the Court and the Registrar of Companies;
   8. manage the company’s affairs in accordance with the proposals agreed by the creditors;
   9. send regular progress reports to the creditors, the Court and the Registrar covering each six month period from appointment;
   10. call Creditors’ Committee meetings;
   11. submit a conduct report in respect of the directors of the company to the Secretary of State for Trade and Industry within 6 months of appointment;
   12. ensure that all documents relating to the business state that the affairs and business of the company are being managed by the administrator;
   13. send out if appropriate revised proposals for creditor approval;
   14. submit a final progress report at the end of the administration to all creditors, the Court and the Registrar.
   1. The administrator, as an officer of the Court, has an overall duty of care to all classes of creditors. In exercising his functions the administrator of a company acts as its agent.

1. 4 Powers of the administrator

1. 4.1 The administrator may:-

1. 1. remove any of the directors from office;
   2. appoint directors;
   3. dispose of assets subject to a floating charge;
   4. dispose of assets subject to a non-floating charge or hire purchase contract with the sanction of the Court;
   5. make distributions to secured and/or preferential creditors;
   6. make distributions to unsecured creditors but only with Court sanction.
   1. These powers are in addition to those already incorporated in Schedule 1 to the Act.

1. 5 Ending the administration

1. The Act provides that the administration will automatically cease to have effect at the end of the period of one year after appointment. This can be extended by the administrator by an application to Court.
2. The administration process may lead to a CVA or a Scheme of Arrangement if the company has been rescued in accordance with the first statutory objective.
3. If property is to be disposed of and the company has not been rescued, then the Act allows for the company to move into CVL in order to make a distribution before dissolution.
4. If there are little or no monies remaining following a distribution to secured and/or preferential creditors then the administrator can distribute to the unsecured creditors following sanction by the Court and then dissolve the company.
5. Whatever the exit route a final progress report must be prepared and submitted to the creditors, the Court and the Registrar.

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