Understanding Company Administration: A Lifeline for Struggling Businesses

A company may enter administration in one of two ways:

• By court order, made in an open hearing, upon a formal application to the court (the court route); or
• Through the filing of documents at court (the out-of-court route) by the company, its directors or the holder of a qualifying floating charge over the company’s assets.

In both cases, the administrator who is appointed must be a qualified insolvency practitioner.

Once appointed, the administrator is an officer of the court. 

This imposes a general duty on the administrator to behave fairly and honourably while in office.  The administrator must carry out their functions in the interests of the creditors of the company as a whole. 

In the rare case where a return to the shareholders of a company is likely, the administrator must also take into account the interests of those shareholders. 

The administrator must perform their functions as quickly and efficiently as is reasonably practicable and must manage the affairs of the company in accordance with the administrator’s proposals.  The administrator’s proposals are contained in a document setting out how the administrator proposes to conduct the administration. 

This document must be prepared and sent out to the members and creditors of the company and to Companies House no later than 8 weeks from the date of the administrator’s appointment.  Except in limited circumstances, the administrator’s proposals must be approved by the company’s creditors. 

Upon their appointment, the administrator must take custody and control of all of the property to which the company appears to be entitled. 

An administrator may do anything necessary or expedient to manage the affairs, business and property of the company in respect of which they are appointed.  In addition, the administrator has a series of specific powers which include:

• Taking control and possession of the company’s property;
• Selling or otherwise disposing of the company’s property;
• Bringing or defending legal proceedings on behalf of the company;
• Making any payments necessary to allow the carrying out of the administrator’s functions;
• Carrying on the company’s business;
• Taking or surrendering a lease of any property on behalf of the company;
• Making any arrangement or compromise on behalf of the company;
• Applying to the court for directions in connection with the exercise of their functions;
• Removing and appointing directors to the company; and
• Making employees redundant.

Directors

• Cannot exercise any powers that might interfere with the administrator’s conduct of the administration, without the administrator’s prior consent.
• Administrators are generally reluctant to allow the continuance of director management powers and are particularly wary of granting general or unfettered permission for directors to continue to trade. Nevertheless, in certain circumstances, an administrator may be prepared to allow directors to continue to exercise management powers to continue to trade the business.
• Notwithstanding the removal of their management powers, the general duties of directors under sections 171 to 177 of the Companies Act 2006 continue to apply during the administration.
• Have a duty to cooperate with the administrator.
• May be investigated by the administrator for any misconduct which can give rise to claims being brought against the directors as individuals.

Creditors

• Cannot bring or continue legal proceedings without the prior consent of the administrator or the permission of the court.
• Will be given the opportunity to form a creditors’ committee. This committee represents the interests of the general body of creditors and acts as a liaison between the creditors and the insolvency practitioner dealing with the administration.
• Can challenge the conduct of the administrator by applying to court.
• Can in certain circumstances apply to the court for the removal of the administrator (often accompanied by an application to appoint a replacement administrator).

Employees

• A company entering administration does not terminate the contracts of its employees. However, administrators often make redundancies, especially if the business cannot continue to trade.
• If an administrator terminates a contract of employment within the first fourteen days following the company entering administration, the resulting liabilities of the company to its former employees (for example, redundancy or unfair dismissal compensation) become unsecured claims in the administration.
• Employees can make a claim to the Redundancy Payment Service for redundancy payments and other amounts due such as wages, holiday pay and commission.
• The administrator may “adopt” an employee’s contract of employment. In such cases, the employee’s wages and salary (including holiday pay, sick pay, payments in lieu of holiday and contributions to occupational pension schemes) are paid by the administrator in priority to the administrator’s own fees and expenses, floating charge holders and unsecured creditors. 

At any time during the administration of a company, the administrator can apply to court for an order ending the administration. 

The administrator must apply to court to end the administration if:

• The administrator thinks that the administration can no longer achieve its purpose;
• The administrator thinks that the company should not have entered administration;
• The company’s creditors decide that the administrator must apply to court to end the administration; or
• The administrator thinks that the purpose of the administration has been sufficiently achieved, where the administrator was appointed by a court order.

More broadly, the administrator can also apply for an order ending the administration if they feel it is appropriate to do so. 

Other ways of ending the administration include:

• Placing the company into creditors’ voluntary liquidation. This can be done where the administrator thinks that the total amount which each secured creditor is likely to receive has been paid to them or set aside for them and a distribution will be made to the unsecured creditors of the company (other than a distribution of the prescribed part).
• Moving the company from administration to dissolution. This will be done if the administrator thinks that the company has no property to distribute to creditors. 
• Placing the company into a company voluntary arrangement, a scheme of arrangement or restructuring plan.