The decision to enter into administration is usually taken due to pressure from creditors. Administration can safeguard you from this to a great extent and provide the time to come up with a workable solution. However, it should be noted that the main aim of administration is to act for the benefit of creditors which may involve selling assets or even the company itself.
The process begins with the appointment of an administrator. This might be at the instigation of the directors, or it could be forced upon them by the holder of a floating charge (usually a bank). Following their appointment, the administrator – who must be a licensed insolvency practitioner – has eight weeks to send formal proposals to all floating charge debenture holders. However, they must first establish that administration is indeed the most appropriate course of action. It may be that alternative recommendations are made, such as creditors’ voluntary liquidation.
Should they decide to proceed with administration, an application must be made to the court and a hearing will subsequently be held for which a report may be produced in order that the presiding judge can understand why this course of action is necessary. It is important to note that once the application has been filed, legal proceedings cannot commence against the firm without the leave of the court, even though the hearing may not yet have been held.
The decision to make the administrative order is the presiding judge’s alone. If it is not seen to be the most appropriate course of action, other decisions might be made, such as for the company to be wound up.
Having entered into administration, the insolvency practitioner will request a statement of the company’s affairs detailing all assets and liabilities. This statement of affairs needs to be sent to creditors to back up proposals and this proposal can then be accepted at a creditors’ meeting held at a later date.
Each creditor must be given at least 14 days’ notice of a formal creditors’ meeting and it must also be held within 10 weeks of having entered administration (although the court can extend these deadlines, if it sees fit). Email and telephone calls are sufficient to constitute the meeting, although if more than 10 per cent of creditors wish to meet in person, then a physical meeting must be held. There is also the option for creditors to form a three to five person committee to act on their behalf.
From this point onwards, progress reports must be sent every six months to creditors, the court and the registrar of companies until the firm is no longer in administration.
It is increasingly common to use administration as a tool when restructuring a company as it buys some time which can be used to deal with lingering difficulties which may be preventing the company from progressing. The protection provided by an administrative order allows for either a survival plan to be created or for affairs to be wound down, if that is deemed to be the most appropriate solution.