Restructuring and insolvency Administration England

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1 Restructuring and Insolvency briefing Spring 2012 Restructuring and insolvency Administration England Summary and implications Administration is a statutory rescue procedure for companies that are experiencing financial difficulties. The bulk of the legislation relating to administration can be found in Schedule B1 to the Insolvency Act 1986 (the Act ) and Part 2 of the Insolvency Rules 1986 (the Rules ). The administration procedure involves the appointment of an administrator who displaces the directors of the company. Following his appointment, an administrator has extensive powers to manage the affairs, business and property of the company, with the aim of achieving one of the statutory objectives of administration set out in the Act. An administrator is an officer of the court and acts as agent on behalf of the company. He has a duty to act in the best interests of the company s creditors as a whole. This duty applies even in circumstances where the administrator has been appointed by a particular creditor of the company. This note provides a short summary of the administration procedure and covers some of the most frequently asked questions. Each administration is different and what follows is a general overview. Specific advice should be taken in individual cases. Ask a question If you have any questions please contact Patricia, Godfrey, Partner T +44 (0) [email protected] The Restructuring & Insolvency team To find out more about the team, and our capabilities click here How is an administrator appointed? An administrator may be appointed over a company in one of three ways: pursuant to a court order; by the company or its directors using the out-of-court appointment procedure; or by a secured creditor who holds a qualifying floating charge (a QFCH) using the out-of-court appointment procedure. The rules and procedures relating to the appointment of an administrator are complex. Different rules apply depending on whether the appointment is to be made in court or out of court, the identity of the person applying for the order/making the appointment and, where the appointment is made out of court by a QFCH, whether it is made during or outside of court hours. 1

2 One point to note is that, even where the application/appointment is being made by another person, a QFCH will usually have the ability to influence the appointment by nominating an administrator acceptable to them. The exception to this is where the application/appointment is made by a prior-ranking QFCH. What is the purpose of administration and how is this normally achieved? An administrator must perform his functions with the aim of achieving one of the statutory objectives of administration, which are as follows: 1. to rescue the company as a going concern; or 2. (if the first objective is not achievable) to achieve a better result for the company s creditors as a whole than would have been likely on a liquidation; or 3. (if the second objective is not achievable) to realise property in order to make a distribution to one or more secured or preferential creditors. In pursuing the relevant statutory objective, an administrator has a broad general power to do anything necessary or expedient for the management of the affairs, business and property of the company. This power is supplemented by a number of specific powers, such as a power to dispose of property, a power to bring or defend legal proceedings and a power to make distributions to secured and preferential creditors of the company. He is also able to make a distribution to unsecured creditors with the leave of the court and can make any other payment which he thinks is likely to assist the achievement of the purpose of the administration. Where an administrator is seeking to achieve the first objective (i.e. to rescue the company as a going concern) he will usually seek to reach a compromise or arrangement with creditors in order to restructure the company s debts and return it to solvency. This may be achieved via one of the statutory restructuring procedures available under English law: a company voluntary arrangement (CVA) or a scheme of arrangement (a Scheme ). Separate briefing notes on these procedures are available upon request. In practice, the first objective is rarely achieved and most administrations are carried out with the aim of achieving the second or third objective. This will often involve a sale of the business or assets of the company to a purchaser. An administrator may dispose of assets that are subject to a floating charge without the consent of the charge-holder. Where assets are subject to a fixed charge, the consent of the chargeholder or an order of the court will be required before the assets can be sold free of the charge. In an increasing number of cases, a purchaser for the company s business or assets will be lined up before the company is placed into administration and the administrator will enter into the sale immediately following his appointment (a pre-pack sale ). A separate briefing note on pre-packs is available upon request. In other cases, an administrator will market the business for a period after his appointment before entering into a sale, sometimes allowing the business to continue to trade whilst 2

3 this marketing and sales process is carried out (a trading administration ). The moratorium To assist administrators in achieving the relevant statutory objective, the company has the benefit of a moratorium for the duration of the administration. This means that, without the administrator s consent or leave of the court: no steps may be taken to enforce security over the company s property or to repossess goods in the company s possession under a hirepurchase agreement; a landlord may not exercise a right of forfeiture in relation to premises let to the company; and no legal process may be commenced or continued against the company or its property. Where an application is made to the court for leave to take any of the steps listed above, it is for the person making the application to persuade the court that leave should be granted. There is an extensive body of case law regarding the factors that may influence a court in evaluating any such application. The leading case is Re Atlantic Computer Systems Plc [1992] Ch 505, in which Nicholls LJ said that, where the court is persuaded that granting the application is unlikely to impede the achievement of the purpose of the administration, then leave will normally be given. In other cases, the court will balance the interests of the applicant against the interests of the other creditors of the company. One point to note is that the moratorium does not prevent a contractual counterparty from terminating a contract entered into with the company. Where a right to terminate a contract has arisen, a counterparty will be entitled to exercise this right in spite of the existence of the moratorium. Priority of payment Funds realised from the assets of a company in administration will usually be applied in the following order: 1. (where those particular assets are subject to fixed-charge security) expenses incurred in realising those assets and debts owed to the fixed chargeholder; 2. expenses of the administration (in the order of priority set out in the Rules); 3. preferential debts (principally certain sums due to employees); 4. a prescribed part of floating charge realisations, which is set aside for unsecured creditors (up to a maximum amount of 600,000); 5. (where those particular assets are subject to floating charge security) debts owed to the floating chargeholder; 6. the company s ordinary unsecured creditors; 7. shareholders. In light of this order of priority, a creditor whose debt would otherwise be unsecured will often seek to argue that their debt should be paid as an 3

4 expense of the administration. There can be some uncertainty as to whether a particular debt constitutes an expense or an unsecured claim. The recent case of Goldacre (Offices) Limited v Nortel Networks UK Limited (in administration) [2009] EWHC 3389 (Ch) caused some controversy when the court held that, where (i) a company in administration uses leased premises during the administration; and (ii) rent falls due for payment during the period in which the company is using the premises, then the full amount of the rent due must be paid as an expense of the administration. Some commentators are of the view that this case was wrongly decided and that only the amount of rent proportionate to the administrator s actual use should be paid as an expense. For example, there is an argument that, where an administrator only occupies part of the leased premises or only occupies the leased premises for part of a rent quarter, then only a proportionate part of the rent should be paid as an expense. However, the decision has not been appealed and at present it represents the current law. In certain circumstances the order of payment outlined above may be varied. For example, where distributions are made via a CVA or a Scheme, creditors may agree to payments being made in a different order. Exiting the administration An administration terminates automatically after one year, but can be extended in certain circumstances with the consent of the creditors or the leave of the court. As mentioned above, it is very rare for a company to be rescued using the administration procedure. As a result, following an administration a company will typically be placed into insolvent liquidation or dissolved. 4

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