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Understanding Administration
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When a company faces insolvency, administration can offer salvation – a chance to reorganise and breathe. This legal process, introduced by the Insolvency Act 1986, aims to rehabilitate struggling companies, giving them some much-needed “breathing space” from creditors while they work towards recovery.
What is Administration?
Administration allows an insolvent company to be restructured and refinanced under the guidance of an appointed Administrator. This process temporarily halts any legal action from creditors, providing the company time to develop a recovery plan.
How Does a Company Enter Administration?
An Administrator can be appointed by a court petition, which may be filed by either the company’s officers or its creditors. Typically, it’s the company’s officers who apply, as they possess the most up-to-date financial information needed for the petition.
The Role of the Administrator
A court-appointed Licensed Insolvency Practitioner serves as the Administrator. Once in place, the Administrator takes control of the company’s operations and assets, stepping into a powerful role that includes the authority to replace directors if necessary. Their primary duty is to manage the company while devising a plan to rescue it.
The Administrator must also keep all stakeholders informed. This includes notifying creditors and shareholders of their appointment and outlining their intended course of action.
Creditors’ Rights and Meetings
Within three months of the Administrator’s appointment, a Meeting of Creditors must be held. During this meeting, creditors can form a committee to represent their interests and request any necessary information from the Administrator. This ensures transparency and keeps creditors involved in the process.
Legal Protection During Administration
While a company is in administration, it is protected from further legal actions. Creditors cannot appoint a Liquidator or Receiver, nor can they initiate any legal proceedings without the consent of the Administrator or the court. This protection allows the Administrator to focus on rescuing the company without constant legal threats.
What Happens When Administration Ends?
Once the Administrator’s work is complete, they must apply to the court to lift the Administration Order. If the company has been successfully stabilised, control may be returned to the company officers. Alternatively, if the aim was to facilitate a Voluntary Arrangement, everything is handed over to the new supervisor. If these efforts fail, a Winding-up Order may be issued, leading to the appointment of a Liquidator to sell off assets and dissolve the company. Notably, all costs incurred by the Administrator are paid before any creditor claims, assuming there are funds remaining.
The Rise of Pre-Pack Administration
In recent years, a new approach known as ‘Pre-Pack Administration’ has gained traction. This involves negotiating the sale of the company or its assets before the formal administration process begins. Once an Administrator is appointed, the pre-negotiated deal is swiftly formalised.
Supporters of Pre-Pack Administration argue that it helps secure the best possible price for the company, as news of formal administration often causes a drop in value. However, this method has faced criticism, particularly from unsecured creditors, especially when the company is sold back to its existing shareholders or directors.
Administration offers a way for companies to find their footing again amidst financial turmoil. For more information on administration procedures, visit www.insolvency.gov.uk.