Administration Procedure Flashcards
What is administration?
Form of company rescue. It is governed by the Enterprise Act 2002 schedule B1.
⁃ We don’t have the full terms of this schedule in the statutes. So administration will not be directly examinable!!!
It is a procedure which gives a breathing space to a company for 12 months where an administrator is appointed to replace the manager of the company and during this 12 month period no rights may be enforced against the company.
How is administration initiated?
⁃ By the Court following petition by the Company or Creditors. This will be done where the company is unable to pay its debts (s 123 IA 86 - absolutely or practically insolvent).
When will the court grant an order?
⁃ If it can satisfy the purposes of administration set out in para 3 to:
⁃ (a) Rescue company as going concern or
⁃ (b) Achieve better result for company creditors than likely if wound up immediately or
⁃ (c) Realise property for secured/preferential creditors
Who can petition court?
Who can petition the court?
Company
Directors (not individual director)
Creditor(s)
What is the affect of administration?
Applicable either if appointed by court or informally
No liquidation
No enforcement of security or other debts
No irritancy (in lease)
What are the powers of the administrator?
See paras 59 and 60 and Sch 1 (which you must read)
Manage company affairs
Duties
Custody of property
Notify appointment
Can dispose of property where security over it
To set out (para 48) objectives to meet purpose of administration
When does administration end?
1 year para 76
(can be extended by application of the administrator/creditor to court)
or
Winding up
For case law on administration have a look at the case of Joint Administrators of Rangers Football Club Plc, Noters 2012 S.L.T. 599
What is receivership?
A company can go ‘into receivership’ as well as ‘into liquidation’. Indeed, a company can be in both states at the same time.
Receivership is concerned with the use of floating charges. A floating charge is a form of security granted by a debtor to a creditor. As the name suggests, a floating charge ‘floats’ over the general property of a company and when there is default on the debt it ‘attaches’ to the property, freezing the latter and ensuring that the creditor gets paid. Since the relevant parts of the Enterprise Act 2002 came into force from 15th September 2003, a receiver may only be appointed in respect of a floating charge granted prior to the relevant date (although there are many exceptions where receivers are permitted). For “new” floating charges there may be an administrator.
Receivership is a curious institution in that it is a hybrid between: (a) an insolvency process, and (b) the enforcement by a single creditor of his security. Receivership represents the enforcement of a “floating charge”.
A floating charge, which is available only if the debtor is a company, affects the debtor’s entire patrimony, movable and immoveable, corporeal and incorporeal, real and personal, present and future. It must be publicly registered (s 410 Companies Act 1985). So long as the company is solvent, the effect of the charge is suspended. At this stage, the charge is not a real right. That does not arise until attachment. Attachment is by either: (i) receivership, or (ii) liquidation.
“Receivership” is thus a method of enforcing a floating charge. Receivership may be judicial or extra-judicial: in practice it is usually the latter. The receiver takes control of the company’s assets, and has power to do juridical acts for the company. He or she can thus sell individual assets or - and this is common - the whole active side of the patrimony. In other words, the receiver can sell the business as a going concern.
The receiver must pay creditors who have priority over the chargeholder, but has no duty to pay other creditors.
What happens on attachment by receivership?
S 53 (7) attaches “as if” a fixed security S 57 – receivers are deemed agents of the company
What does this mean?
See National Commercial bank v Telford Grier 1969 SC 181
Forth and Clyde Construction Ltd v Trinity Timber 1984 SC 1
Receiver has power to sell – but is not secured creditor.
Chargeholder is secured creditor but cannot sell.
What is the procedure of receivership?
A receiver is appointed to enforce the floating charge.
Unlike a liquidator, the receiver acts in the interest of the holder of the floating charge and only has very general duties to the company. However, the receiver is an agent of the company. The primary duty of the receiver is to realise the frozen assets to pay the debts secured by the floating charge.
The receiver is empowered to act in accordance with the powers found in 1986 Act, Sch 2 and the powers include that to sell on business
If company also in liquidation, holders of a floating charge rank below preferred debts.
What are the requisite timings of receivership?
The holder of a floating charge can appoint a receiver at any time after default on a debt. The appointment of a receiver means that the company is ‘in receivership’, but this does not prevent the company trading nor does it mean that the directors are removed from their office. The extent of their remaining powers depends on the scope of the floating charge. Contracts of the company are not affected.
A floating charge will attach immediately if the company goes into liquidation (s 463, Companies Act 1985)
A receiver can be appointed even after the company has gone into liquidation, and a company can go into liquidation even after it has gone into receivership. see Manley Petitioner 1985 SLT 42
What is the order of distribution of money in a receivership?
The order of priority of distribution of moneys by the receiver is in IA 1986 s.60. It is:
- Fixed securities ranking prior to or equally with the floating charge (see below);
- those who have “effectually executed diligence” on property subject to the charge; Lord Advocate v Royal Bank of Scotland Ltd 1978 SLT 38, 1977 SC 155; Iona Hotels Ltd Petrs 1991 SLT 11; Armour & Mycroft Petrs 1983 SLT 453 (see Sim 1984 SLT (News) 25 and Wortley, “Squaring the circle” 2000 JR 325 for discussion of this area).
- debts incurred by the receiver;
- the receiver’s outlays and fees;
- preferential creditors;
- the floating charge holder;
- another receiver/holder of fixed security/liquidator/company.
What is the ranking of floating charges?
Floating charge on attachment ranks above other claims including
(a) ordinary unsecured creditors (except the “prescribed part” – as introduced by Enterprise Act 2002)
(b) later floating charges: s 464 (4)
(c) later rights in security made real rights after the creation of the floating charge (if a negative pledge clause: s 464 (1) and (1A) of the Companies Act 1985: AIB Finance Ltd v Bank of Scotland 1995 SLT 2)
The floating charge ranks after:
(a) Prior floating charge;
(b) Prior real security (and negative pledge clauses);
(c) Prior and posterior tacit security (cf Cumbernauld Development Corporation v Mustone 1983 SLT (Sh Ct) 55 with Grampian Regional Council v Drill Stem 1994 SCLR 36);
(d) Preferential creditors (a curious regime – amended substantially by Enterprise Act 2002);
(e) “Effectually executed diligence” Lord Advocate v Royal Bank 1977 SC 155 (see Sim 1984 SLT (News) 25 and Wortley, “Squaring the circle” 2000 JR for discussion of this area);
(f) Quasi-securities, eg trusts
Circles of priority: the diligence circle; the preferential creditors circle
What are company voluntary arrangements?
Under IA 1986 ss 1 to 7, directors of company may make a proposal to creditors for a composition of debts. Insolvency practitioner nominated as trustee to administer scheme. Meetings of company and creditors consider proposals. (Can also be Schemes of Arrangement under the Companies Act 1985). Although statistics are not available CVAs and Schemes of Arrangement are not very common in Scotland.
