When a company is facing financial difficulties, it can be placed into Administration.
Administration is a procedure which places a company under the control of an insolvency practitioner and the protection of the court with the following objectives:
- rescuing the company as a going concern, or
- achieving a better result for the creditors as a whole than would be likely if the company were wound up without first being in administration, or
- if the administrator thinks neither of these objectives is reasonably practicable realising property in order to make a distribution to secured or preferential creditors.
While a company is in administration creditors are prevented from taking any actions against it except with the permission of the court.
Reforms were introduced by the Enterprise Act 2002 to encourage the use of administration as the preferred vehicle for company and business rescue within formal insolvency.
An administrator may be appointed –
- by an order of the court, on application by, amongst others, the company, its directors, one or more creditors, or, if it is in liquidation, its liquidator;
- without a court order, by direct appointment by the company, its directors or a creditor who holds comprehensive security of a type which qualifies him to make such an appointment – usually a bank debenture.
An administrator’s powers are very broad. They include powers to carry on the company’s business and realise its assets. The administrator displaces the company’s board of directors from its management function and has the power to remove or appoint directors. The administrator must prepare proposals for approval by the creditors setting out how he intends to achieve the purpose of administration.
There is a one year time limit within which the administration must be concluded, but this period can be extended with the agreement of the creditors or the permission of the court if more time is needed to achieve the purpose of administration. The administration may also come to an end if the administrator thinks the purpose of administration has been achieved or cannot be achieved.
On conclusion of an administration –
- the company may be returned to the control of its directors and management;
- the company may go into liquidation;
- the company may be dissolved (if there are no funds for distribution to unsecured creditors);
- if a voluntary arrangement has been agreed during the administration, the arrangement may continue according to its terms (it is possible for a voluntary arrangement to run concurrently with an administration).