United Kingdom Company Law – Insolvency and Administration [Part 3]

4 Administration

As we know that in difficult situations (financial difficulties) company goes into liquidation. But some time it may be saved at the behalf of administrator, this process of saving company from liquidation is known as administration process.

Administrator is the person who is appointed under an insolvency act 1986 to control company affairs in such a manner to rescue the company from being it dissolved.

Roles and responsibilities of administrator

There may be following roles during administration process.

• Rescuing company from financial difficulties by taking control and putting extra effort to manage the processes more efficiently
• Obtain the list of all creditors, members and directors and then send them the letter of appointment so that they aware that company is under the control of administrator.
•  Within seven days of appointment the administrator must send the notice of appointment to the registrar also.
• Require statement of affairs from the concerned people, they are mostly directors.
• Understanding all affairs of the company, take some decisions and prepare proposals for improvement in weak areas and send these proposals to the registrar and creditors for their agreement and approval.
• Ensure that all business documents contain the identity of administrator.
• A statement must be published which clearly describes that now all company’s property and business affairs managed by the administrator.
• Realizing some assets of the company to pay secures creditors.
• Create the situation which may avoid the creditors to give petition of winding up to the court.

Statement of affairs

This statement is required by the administrator at early stage of administration because it contains following details which is very helpful for administrator.

• Details of company assets
• Complete description of liabilities and debts
• Detail of creditors and debtors with their amounts
• Details of short term or long term loans and if any other securities

The statement of affairs must be provided to the administrator within eleven days of being requested. The statement of affairs must be prepared by the directors or any other officer who has authority to do so with correct details. Any detail which is inappropriate or may not be correct leads to the fine or imprisonment.

The power and authorities of administrator are defined by the insolvency act 1986 which are given as follows. Administrators may have the same powers those are granted to the directors of the company because administrator takes the position of directors and acted as the managing director of the company.

• Authority to enter into any agreement of sale or purchase which is beneficial in favour of company
• Authority to take all general decisions and manages the affairs of business dealings.
• Authority to realize some assets of the company to pay secured creditors.
• Authority to pay unsecured creditors but before this he may have to apply to the court for approval.
• Authority to put forward reconstruction proposals.
• Authority to appoint or remove directors, employees and other managers.
• Authority to call meetings of members and creditors.
• Authority to examine all the statutory reports and accounts.

After delegating all these authorities, the administrator must perform their duties within the scope of their powers. If members and creditors feel that administrator is not doing well in favour of company than they may apply to the court for his dismissal.

The administrator is appointed when the order of administration has been passed by the court, once it is passed then no petition will be acceptable by the court to wind up the company.

The administrator may be appointment by following people

• Directors
• Company
• Floating charge holders
• Court 

The court may appoint administrator when following person may apply for administration to the court and an individual person cannot apply to the court for administration.

• Company
• Directors
• Creditors
• Justice or the chief executive of the Magistrates’ court

Before appointing administration the company may have to give order of administration if satisfied by the following conditions. But this order of administration lasts for 12 months. If administrator failed during this period then court may have to re order with an extended period of six months.

• If company is unable to pay the debts
• When it is noted that some reasonable basis are here that may achieve the purpose of administration

Floating charges holders also have right to appoint the administrator so that company regained its financial position and become able to pay its creditors. But all this is controlled by the court. The following documents must be given to the court by the floating charge holders.

• A notice of appointment and identifying the name of administrator
• An agreement letter which shows that the identified person is willing to be appointed as administrator
• The statement at the behalf of administrator that purpose of the administration is likely to be achieved
• The administrator must be educated, experienced and competent so a statutory declaration must be here that he qualifies to make the appointment.

If the above criterion is meeting by the charge holders then the appointment will be considered as valid. After appointment the administrator is introduced to all staff and directors and all necessary controls transferred to him.

Administrator can also be appointment by the company or its directors if they want to do this.

Directors are the persons who better know about the financial position of the company so in difficult circumstances they are the first people to know it. They immediately apply to appointment administrator so that company must be saved from worse condition and from being it dissolved.

Company as a separate legal entity have right to take decision at its own behalf. So when company is unable to pay its debts then in that condition it is best reasonable way to appoint the administrator before any petition of winding up by the creditors or members.

But company may appoint administrator only in the conditions given below.

• There is no order of winding up previously.
• No one is appointed as an administrator before it by the charge holders.
• Company is not in a state of liquidation.
• Company is unable to pay its debts

When all the necessary steps taken and it results in an effective appointment of administrator then following effects on the company.

• Legal commencement against the company
• Repossession of hire purchase property
• Office of previous receiver is vacated and next appointment is stopped until completion of administration process.
• Outstanding petition of winding up is dismissed
• Powers of managers and directors ceased and they have to work with the consent of administrator

The administration process is initiated by the administrator after his appointment.

To make this process effective the administrator must have to follow the given steps.

Notification

Give notice of appointment to the registrar and to all creditors.

Manages statement of affairs

Immediately after appointment, the administrator requires statement of affairs which contains details of company assets, liabilities and creditors. It may be helpful to gain knowledge of the business and its drawbacks which should be improved.

Giving proposals

Through deep understanding of statement of affairs, administrator becomes able to prepare proposals within 8 weeks of time period. These proposals are the solutions of problems or we can say the prescribed methods to resolve financial issues which make company as a going concern.

The copy of proposals sends to the registrar and the creditors for acceptance.

Meetings

After giving proposals, the administrator calls meetings of creditors or members to negotiate with them about given proposals. If the creditors not agree with the proposals of administrator then he may change the proposals and recall their meetings with new or amended proposals.

It may be held after 10 weeks and a notice of 14 days must be given to all creditors before meeting.

End of administration

The administration process ends when it reaches at following conditions.

• The purpose of administration achieves, it means when the company become going concern and starts successful trading.
• The time period of 12 months completed. Because administration lasts for 12 months even if the purpose not achieved so the office of administrator vacated and company goes into liquidation (administration failed).
• If directors or creditors find another way for improving the financial position then this process can also be brought to an end.
• Sometimes creditors voluntarily apply to the court to end up this process if they are not satisfied.

4.6 Benefits of administration

If administration process becomes successful then it may give benefits to following three parties

• Creditors
• Members
• Company

Company

It provides temporary insulation to company from its creditors meanwhile the company prepares some rescue plans to save its existence as a going concern.

Moreover a new direction of business is provided to the company to save it from liquidation.

During administration process the charge of debt also stopped so extra cost saved.

If creditors or members apply for administration then the fee and all other expenses of administration must be covered by the creditors and members and cost of company saved.

Members

If administration process is successful then the share value may be enhanced which means favorable for shareholders and they also get a chance to restore their previous profits when company started to regenerate profits.

Creditors

One of the most important benefits to the creditors is that they can get back their money from the realization of assets at the behalf of administrator.

After successful administration the creditors continue their relationship with company and get a chance of improved business.

It is a cheap source through which creditors get back their past debts.