Administration

Question 1

Objectives of an administrator

Answer 1

• aims to (if possible) rescue a company which is insolvent

- if not possible, aims to achieve best possible results for the creditors

Question 2

It is a ‘collective’ procedure

Answer 2

The administrator acts in the interests of all the creditors rather than on behalf of one of them.

Question 3

Eg. of company that administrators were able to rescue

Answer 3

Cath Kidston went into administration in 2020 resulting in the closure of their high street shops, but the continuation of the online business (continued trading in a streamlined fashion).

Question 4

Eg. of company that went into administration then liquidation

Answer 4

BHS which went into administration in 2016 and ultimately into liquidation

Question 5

Who are administrators?

Answer 5

Administrators are qualified insolvency practitioners

Question 6

How are administrators appointed?

Answer 6

May be appointed by the court or under the out of court procedure.

Question 7

Who do administrators owe duties to?

Answer 7

To both the court and to the creditors collectively.

Question 8

The statutory objectives of administration

Answer 8

Section 8 and Schedule B1 IA 1986 set out the objectives of the administration, stating that an administrator:

“…must perform his functions with the objective of:

(a) rescuing the company as a going concern, or
(b) achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up…,
(c) realising the property in order to make a distribution to one or more secure or preferential creditors.”

These cascading objectives are extremely important as they guide the actions of the administrator throughout the process. Objective (b) is most likely to be achieved.

Question 9

Appointment of administrator – court procedure

Answer 9

The court may appoint an administrator where the company is or is likely to become unable to pay its debts (Sch B1 para 11(a)) on the application of:

• The company
• The directors
• One or more creditors

The appointment may only be made where the order is reasonably likely to achieve the purpose of the administration (Sch B1 para 11(b)).
(AA Mutual International Insurance Co Ltd)

Question 10

(AA Mutual International Insurance Co Ltd)

Answer 10

The applicant was an insurance company which sought an administration order. The court found that it was probable that the applicant would be unable to pay its debts as it had no income. The administration was also held to be reasonably likely to achieve better results for the creditors as a whole than winding up, therefore the application was granted.

Question 11

Appointment of administrator – out of court procedure

Answer 11

The following parties may appoint an administrator using the out of court procedure:

• The company or the directors (Sch B1 para 22 IA 1986); or
• A qualifying floating charge holder (‘QFCH’ - this means the holder of a floating charge created after 15 September 2003 relating to the whole or substantially the whole of the company’s property) (Sch B1 para 14 IA 1986). This is often a bank.

Question 12

The most common method of appointing an administrator

Answer 12

By directors using the out of court procedure.

Question 13

Directors cannot use the out of court procedure where a creditor has presented a petition for the winding up of the company

Answer 13

In these circumstances, the directors can apply to court for an administration order or the qualifying floating charge holder can use the out of court procedure to appoint an administrator.

Question 14

What about the directors?

Answer 14

The directors are unable to exercise any of their management powers without the consent of the administrator. The administrator takes on the running of the business with the aim of achieving the purpose of the administration.

Question 15

Once appointed, what is the role of the administrator

Answer 15

Administrator has 8 weeks to produce a report setting out proposals for future of company’s business
Must be put to all creditors for approval
If proposals rejected, company usually put into liquidation.
If accepted, administrator has several options including restructuring the creditors’ rights under a scheme of arrangement or implementing a CVA so that the company exits administration.
There is a 12-month fixed time limit for the completion of administrations, although it is possible to obtain extensions.
The administrator must report the outcome of the administration to the court.

Question 16

Moratorium

Answer 16

A key benefit of administration.

Sch B1 para 42-44 IA 1986

Question 17

What happens during administration?

Answer 17

During this time, all business documents and the company’s website must state that the company is in administration.
During the moratorium (except with consent of the court or the administrator in each case):

No order or resolution to wind up the company can be made or passed;
No administrative receiver of the company can be appointed;
No steps can be taken to enforce any security over the company’s property or to repossess goods subject to security, hire purchase and retention of title;
No legal proceedings, execution or other process can be commenced or continued against the company or its property, and
A landlord cannot forfeit a lease of the company’s premises by means of peaceable re-entry.

Question 18

Powers of the administrator

Answer 18

Administrators have wide powers under IA 1986 to “do all such things as may be necessary for the management of the affairs, business and property of the company” (s 14(1) IA 1986). These include the powers to:

• Remove and appoint directors (s 14, Sch 1 and para 61 Sch B1);
• Dispose of property subject to a floating charge (para 70 Sch B1);
• Dispose of property subject to a fixed charge (with the court’s consent) (Para 71 Sch B1)

In addition, the Small Business, Enterprise and Employment Act 2015 (SBEEA 2015) granted additional powers to administrators to allow them to bring proceedings against directors for fraudulent and wrongful trading

Question 19

Approach of the court

Answer 19

Re T & D Industries Ltd: Neuberger J set out the approach that the court should take towards the administration process. In this case the joint administrators of two connected companies applied for a direction under s 14(3) IA 1986 that no direction of the court was necessary before they could dispose of assets belonging to the companies, even though the proposed sale had not been disclosed to the creditors. The court noted that the intention was that administration proceedings should be a cheaper and more informal alternative to liquidation and therefore the administrators did not require the court’s leave. Neuberger J held that although an administrator needs time to obtain the necessary information, this should be done as quickly as possible and administrators should call a meeting of creditors as soon as reasonably feasible. Commercial decisions are for the administrator and not the court and an application for directions should only be made where there is a point of principle in issue or a dispute as to the appropriate course of action to be taken. Where an administrator needs to make an urgent decision they should consult the creditors to the extent possible.

Question 20

Pre-packaged sales in administration

Answer 20

A pre-packaged administration is where the business of an insolvent company is prepared for sale to a selected buyer prior to the company’s entry into administration. The agreed sale is carried out by an insolvency practitioner shortly after their appointment.

Often the pre-pack purchaser will be one or more of the existing owners or directors of the insolvent company.

Question 21

Why are pre-packaged sales in administration controversial?

Answer 21

particularly where the sale is to existing members or management. The concern is that often creditors are given insufficient information to determine whether the sale was in their best interests. This concern led to calls for greater transparency, and the Association of Business Recovery Professionals issued a Statement of Insolvency Practice (SIP) in 2013, requiring clear, comprehensive and timely explanations to creditors following pre-packaged sales.

Question 22

Debenhams (position as at May 2020)

Answer 22

The UK department store group owned by its lenders following administration in 2019, appointed administrators once again in May 2020 to protect itself from its creditors. Creditors were considering using winding-up orders to get paid. Although the company closed 22 stores in 2020 and is expected to close 28 in 2021, the new administration is likely to hasten the demise of many more of its outlets in the longer term. Although its online operations were supplying customers, all its stores were in lockdown. It had heavy debts of around £600m. The company was loss-making and without the sales revenue from its existing stores it was in deep trouble. Debenhams closed its Irish division permanently, which had eleven stores, 958 staff and 300 concessions, and also closed its Hong Kong and Bangladeshi subsidiaries.

Question 23

Cath Kidston (position as at May 2020)

Answer 23

The fashion and accessories chain appointed administrators in April 2020. In May 2020 it announced that it will close its UK branches, concentrating on Asia, the wholesale business and online sales. Like many fashion retailers, the company had longstanding problems in maintaining sales and profitability. It lost £27m between 2018 - 2020, resulting in its closing stores and cutting head-office staff. There were 200 stores globally. All 60 UK sites closed, with only 32 of its 941 UK staff being retained.

The company’s owners, Barings Private Equity Asia, bought it out of administration on a pre-pack basis, having previously tried to sell it. Finances were so poor towards the end that initially Cath Kidston announced that they would only be paying part of the wages owed to employees. After intense adverse publicity the company agreed to make payments in full, but up to a week late.

The company continued to trade in the UK as an online-only retailer.

Question 24

Administrative receivership

Answer 24

Is a procedure which allows a secured creditor to appoint an administrative receiver to seek repayment of the secured debt. It is an individual procedure (benefitting only the appointing creditor) rather than a collective procedure which looks to benefit all creditors such as administration.

There is no statutory moratorium with administrative receivership which means that the procedure often leads into liquidation.

This procedure has been restricted in use since 15 September 2003 when the Enterprise Act 2002 came into force. Administrative receivers can only be appointed by qualifying floating charge holders:

• Where the charge was created prior to 15 September 2003 or
• Where one of the statutory exceptions applies.

This procedure is now rare.