M6.3 Effect of administration on creditors' rights

Question 1

What is the effect of an administration on directors?

Answer 1

 Control of company passes from directors to administrator
 Directors remain in office unless they resign
 Administrator takes over control of company
 Directors cannot exercise any management powers without administrator’s consent
 Administrator can appoint or remove directors

Question 2

What is the effect of an administration on contracts?

Answer 2

 Pre-administration contracts continue unless contain clause to terminate

 Termination of pre-administration contract by the administrator or the counterparty will create an unsecured claim against company

 Company can enter into new contracts

 All debts and liabilities on contracts entered into by administrator are an expense of the administration

 Therefore, are paid in priority to creditors’ claims

Question 3

What is the effect of an administration on suppliers?

Answer 3

 Administrator has power to compel continuing supply of utilities
 The supplier can not make payment of arrears a term of continuing to supply
 Can insist on a guarantee from the office holder
 Essential supplies: utilities, communications services and information technology
 Additional restriction on insolvency termination clauses inserted by CIGA2020
 Suppliers cannot terminate contracts solely due to the company entering an insolvency procedure
 Applies to goods and services (not customer contracts)
 Do not apply to terminating events that occur after the commencement of the procedure
 Supplier can apply to court if continued supply will cause the company hardship

Question 4

What is the effect of an administration on employees?

Answer 4

 Existing contracts of employment continue

 Administrator has 14 days from date of appointment to decide whether to adopt contracts

 Post-admin wages and salary payable BEFORE administrator’s fees and expenses, including holiday and sick pay and contributions to occupational pensions

 Administrator subject to normal rules re: consultation with employees and redundancy etc

 Redundancy and pay in lieu of notice will be claims in the administration

 TUPE may apply if employees are transferred

Question 5

What is the effect of an administration on creditors?

Answer 5

Creditors rank for dividend based on the usual statutory priority
 But: No process for paying an unsecured dividend other than the prescribed part
 Company would exit administration to CVL for this purpose
 Administrator may dispose of assets subject to security, with the
secured creditor’s consent or court authority
 Interest on secured debts continues to accrue
 Creditors are prevented from taking any legal or enforcement action against the company

Question 6

What is an administration moratorium?

Answer 6

NB this is different to CA moratorium

 Provides breathing space to achieve objectives of administration
 Assists rescue of company
 Protects ongoing trading
 Facilitate sale of business

Provides a stay on insolvency and other legal processes unless consent of administrator or permission of the court

Question 7

What is the purpose of an interim moratorium?

Answer 7

 To protect and preserve position between decision to place company into administration and when administrator appointed
 Effective from date of application or notice of intention to appoint until time of appointment
 Para44 chB1 IA86
 Applies the full moratorium protections (Para42&43) during specified pre-
appointment periods
 But subject to certain exceptions

Question 8

What are the time limits for an interim moratorium?

Answer 8

Application for administration filed with court - until order made or application disposed of.

Company or directors give notice of intention to appoint to QFCH - until the earlier of appointment or 10 days.

QFCH give notice of intention to appoint to prior QFCH - until the earlier of appointment or 5 days.

Question 9

What are the exceptions to interim moratorium protection for a proposed administration?

Answer 9

If an administrative receiver is already in office, the interim moratorium does not start until the appointor consents

Interim moratorium does not prevent or require court permission for:
 Presentation of a winding up petition in public interest or by the FCA/PRA
 Appointment of an administrator out of court by the holder of a QFC
 Appointment of an administrative receiver
 An existing administrative receiver carrying out their functions

Question 10

What are the 4 strands of protection upon entering administration?

Answer 10

Dismissal of pending winding-up petition Dismissal of administrative or other receiver
Moratorium on insolvency proceedings Moratorium on other legal process

Question 11

What happens to a pending petition when a company enters administration?

Answer 11

A petition for the winding up of the company
 Shall be dismissed on the making of an administration order; and
 Shall be suspended while the company is in administration following an appointment by QFCH

 Except:
 On a petition presented on public interest grounds; or
 On a petition presented by the FCA or PRA

N.B. Company or Directors cannot use the “out of court” route if a petition is outstanding

Question 12

What happens to an admin receiver or receiver when a co enters administration?

Answer 12

 Any administrative receiver must always vacate office
 Any receiver over part of the company’s property must vacate office, if required by the administrator
 All cases: The receiver’s fees are charged on the assets under their custody or control
 A receiver appointed under a floating charge is no longer obligated to pay the preferential creditors

Question 13

What is the impact of the administration moratorium on other legal processes?

Answer 13

Precluded without the consent of the administrator or the permission of the court:
Security cannot be enforced
 Goods under HP cannot be repossessed*
 Landlord cannot exercise a right of forfeiture by peaceable re-entry
 No legal proceedings may be started or continued

Absolute prohibition: No administrative receiver may be appointed

• HP includes conditional sale, chattel leasing agreements & retention of title agreements