Administration is a procedure for which a licensed insolvency practitioner (IP) is appointed to oversee and protect a business (a limited company or a partnership).
When a business is in administration, no legal action can be taken against it, nor any of its assets removed, without the approval of the court or the appointed IP (who acts as the administrator).
For a business to go into administration, it must achieve at least one of these three objectives:
- save or rescue the business as a going concern
- give a better outcome than it being in liquidation
- repay a secured creditor, such as a bank or factoring company
Administration can be seen as a good option for businesses that are under severe financial pressure, need urgent protection, and need time to consider options or agree a sale. Companies or partnerships can go into administration very quickly – it can be in place within a few hours (while liquidation can take up to two weeks).
Once a business has decided that administration is the right option, an administrator can be appointed in three ways:
- By the directors or company: once the directors sign the notice of intention to appoint an administrator, they have 10 days of protection, when no creditor can take any recovery action. This occurs before they are actually in administration, so can be very useful, and can give the business and directors time to decide the way forward.
- By a bank or secured lender with a debenture on the company.
- By the court, which could be the result of a request by a creditor.
The administration process
Once a court has approved the administration, the company is then under the control of the administrator and the directors’ powers over the company cease, though they still have obligations to cooperate.
During the period of administration, the administrator will often continue trading the business on a smaller scale. The objective may be to try and save all or part of the business to increase the return to creditors, or for bank appointed administrators to pay the bank back.
The trade or assets of the business can be sold to anyone, including the existing directors, management or shareholders, as long as they offer the best terms and value.
If the company is using a pre-pack administration, then the assets are usually sold on the day of administration.
Some companies or partnerships cannot be traded while in administration. For example, the Law Society rules forbid solicitors practices being traded while in administration, so they will always be sold on the day of administration by a pre-pack, or will have to cease trading.
An administrator must report to creditors within eight weeks of the date of administration setting out their proposals.
If the administrator has not called a meeting of creditors (which would then be held within 10 weeks of the date of administration), then 10% of creditors can request a meeting be held.
An administrator can be removed from office by a majority of creditors, unless they were appointed by a charge holder, such as a bank.
An administrator reports to creditors in writing every six months and at the end of the administration. The information contained in the report will include:
- what the administrator has done
- what assets have been sold and to whom
- the receipts and payments to date and the administrator’s fees
This information is also filed at Companies House.