The process of administration and the effect that it has on the company.

As the number of high profile company administrations increase we take a brief look at the process of administration and the effect that it has on the company, its officers, employees and creditors.

What happens during an administration?

Administration provides an opportunity for either the restructuring of a company or the realisation of its assets. The process takes place under the protection of a statutory moratorium.

Upon entering administration an insolvency practitioner will be appointed to act as administrator. Their role is to achieve one of the following objectives in this order:

• Rescue the company as a going concern;
• The achievement of a better result for creditors as a whole than would be likely if the company were wound up;
• Realisation of company assets to make a distribution to one or more secured or preferential creditors.

A company in administration receives the benefit of a statutory moratorium which serves to prevent creditors enforcing any claims against it to provide an opportunity to reorganise the company or realise the assets.

Once appointed the administrator becomes responsible for the management of the company and the existing directors are prevented from exercising any powers which may interfere with the administrator’s management of the process.

An administrator has the power to remove any director from their position and can also appoint additional directors. An administrator can require a current or former officer of the company to provide a statement of the company’s affairs, setting out the assets and liabilities of the company, to assist the administrator to assess the financial position of the company.

The administrator will need to decide whether to retain employees or make redundancies as administration does not automatically terminate contracts of employment. Any redundancy payments or other employment liabilities become unsecured claims. If an employee is retained their salary will be paid as an expense of the administration.

The moratorium will not prevent a creditor from terminating a contract with the company if the contract provides for such grounds for termination. In addition the moratorium prevents creditors from repossessing assets under a hire purchase agreement, lease or retention of title clause. The fact that a company has entered or is soon to enter administration does not necessarily mean that the business will not survive.

Pre-pack sale

The existing management of a company heading towards administration may wish to consider buying the business of the company once the company has entered into administration. This type of arrangement is known as a pre-pack sale as the terms of the sale agreement are agreed in principal prior to the company entering administration. The marketing of the business and the assets of the company is undertaken by an insolvency practitioner who is then appointed administrator.

In many instances an administrator will achieve the best result by way of a pre-pack sale. The advantages of a pre-pack sale are that they save on the costs of administration, can preserve more jobs, limit adverse publicity and maintain business continuity.

Pre-pack sales often draw criticism due to the fact that creditors are largely left in the dark as to the proposed sale and are not provided with an opportunity to raise an objection. The Government has, therefore, put forward proposals to change the rules relating to pre-packs which amongst other things will involve providing creditors with increased notice of the proposed sale.

It is important that directors of a company, that is struggling financially, consider when it is appropriate to seek professional advice, either from a financial advisor or a solicitor. A director, who continues to trade despite knowing or should have reasonably known that there was no reasonable prospect of the company avoiding insolvent liquidation, could be guilty of wrongful trading.

A director who is found to be guilty of wrongful trading could be required by a court to contribute towards the assets of the failed company.