Week 10 - Administration, Wrongful Trading & Ethics/Sustainability Flashcards
What is adminsistration?
Introduction by the Insolvency Act 1986 (IA 1986)
Acts as a method to possibly save a financially unsuccessful company (or LLP) from going into liquidation
Once a company is in administration, this prevents any legal action against the company from proceeding
The company, the court or a floating charge holder appoints an administrator
What must the adminstrator be?
The administrator must be a qualified insolvency practitioner
What is the primary object of the adminstrator? why is this the primary object?
The administrator’s primary objective is to prevent the company from being liquidated
This will not only protect the workforce and those reliant on the company’s business, but will hopefully provide a better result for the creditors than if the company were simply liquidated
If this is not possible, they will attempt to pay off as much of the company’s liabilities, using the assets the company has
What must the adminstrator do 8 weeks after the appointment?
8 weeks after appointment, the administrator must produce a written statement that details the status of the company and explains what they plan to do
What are the options availible to the adminstartor?
The administrator may decide that the best option for the company is to:
Sell the business as a “going concern” to another company
Negotiate a Company Voluntary Arrangement (CVA)
Restructure the business (e.g. disposal of divisions)
Sell the assets as part of a creditors’ voluntary liquidation, pay the creditors then close the company
Wind down the company if there are no assets to sell
What is the company voluntary arrangement?
Company Voluntary Arrangement (CVA) is where the administrator works out an agreement between the company and its creditors in relation to the company’s outstanding liabilities
The administrator will work an arrangement that covers how much the company can potentially pay back, plus a schedule of repayments over time – note that this may not cover the full amount owed
This schedule must be realistic and achievable by the company
after the CVA is created what happens?
Once the possible CVA is created, the administrator will write to the creditors with the proposal
There will then be a meeting for the creditors when the administrator can put the proposal forward
At the meeting the creditors will vote on whether to accept the CVA – it must be support by creditors that are owed at least 75% of the company’s debt
When does the adminstartion end?
The administration period ends:
When the purpose of administration has been achieved e.g. the company was successfully sold or a CVA was agreed with the creditors
When the administrator’s contract ends – this happens automatically after one year, but can be extended
If the administrator decides that the business cannot continue as a going concern – i.e. the liquidation process formally commences
What is wrongful trading?
Occurs when the directors of a company have continued to trade a company past the point when they:
“knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation“; and
they did not take “every step with a view to minimising the potential loss to the company’s creditors“
is wrongful trading a civil or criminal offence and who is liable?
Is a civil rather than a criminal offence
All types of directors may be found liable of wrongful trading, including shadow and de-facto directors
What if a director is found liable for wrongful trading?
What if a director is found liable for wrongful trading:
The court can order that they make a contribution to the company’s assets (IA 1986, s 214)
Additionally, the court may make a disqualification order under the Company Directors Disqualification Act 1986, s 10
This could disqualify the director(s) from being a company director for up to 15 years
what are some uk legislation that companies have to comply with?
We know that companies have to comply with all relevant UK legislation, which includes:
Equality Act
Human Rights Act
Consumer Rights Act/SOGA
Data protection laws (DPA, GDPR etc.)
