Administration (insolvency)
Encyclopedia
As a legal concept, administration is a procedure under the insolvency
laws of a number of common law
jurisdictions. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – an alternative to liquidation
– is often known as going into administration. A company in administration is operated by the Administrator (as interim Chief Executive) on behalf of the creditors as a going concern
while options are sought short of liquidation. These options include recapitalising the business, selling the business to new owners, or demerging it into elements that can be sold and closing the remainder.
law, the administration regime is governed by the Insolvency Act 1986
, as amended by the Enterprise Act 2002
. An "administrator" can be appointed without petitioning the court by the holder of a floating charge
(created since 15 September 2003), by the company or by its directors. Other creditors must petition the court to appoint an administrator. The administrator must act in the interests of all the creditors and attempt to rescue the company as a going concern
. If this proves impossible he or she must work to maximise the recovery of the creditors as a whole. Only then may the administrator attempt to realise property in favour of one or more secured creditor. Administration is analogous to going into "Chapter 11
" in the United States
, although there are certain key differences, mainly stemming from the fact that English law does not include the debtor in possession
concept. During the reorganisation period, as a result, the administrator usually runs the business rather than the directors, and any additional liquidity requirements effectively have to be met by funds provided by existing creditors rather than by any super-senior 'DIP financing'.
The administrator is an officer of the court and an agent of the company, and is not personally liable for any contracts she or he makes on behalf of the company. He has the power to do anything necessary or expedient for the management of the affairs, business and property of the company.
The new administration regime introduced by the Enterprise Act 2002 replaces the previous situation where administrative receivership was available as an alternative to administration, which has traditionally been a more rescue-oriented insolvency regime. This regime allowed the holder of a floating charge
to appoint an administrative receiver to realise assets in his favour, and also to block an administration order sought by a borrower. This was felt to be too favourable to the floating charge holder at the expense of other creditors. Holders of a floating charge created prior to 15 September 2003 retain their right to appoint an administrative receiver, but all purported rights to do so created after that date will be construed as rights to appoint an administrator (subject to certain specific, rare exceptions).
A court order is issued that forbids any form of legal or insolvency action without the court's permission. An application to the court for an administration order may be made by the company, the directors, a creditor or any combination of them. The Enterprise Act 2002
amended the Insolvency Act 1986
to provide an out-of-court process to appoint an administrator to the holder of a floating charge or the company or its directors. This is considerably cheaper and simpler than the previous system, which involved an application to court.
to act as the administrator appointed by the court.
This process has advantages in that it enables the administrator to realise a greater amount for the assets due to business continuity and the goodwill of the company are preserved. The employees of the company are also usually transferred to the new company preserving jobs.
Pre-packs have attracted criticism because of the appearances it gives to unconnected parties that the company has just continued without its creditors. SIP 16 was introduced in January 2009 to assist Insolvency Practitioners in pre-pack cases. It was designed to make the process more transparent for creditors and to ensure that fair value was obtained for the assets.
In November 2009, the Office of Fair Trading announced a study into corporate insolvencies, with particular focus on pre-pack administrations. It will report on whether the insolvency market is operating efficiently, with enough freedom of competition between insolvency practitioners and whether consumers and creditors are being treated as fairly as possible.
A recent example of a pre-pack is the sale of the assets of Cobra Beer
to Coors
immediately after Cobra Beer entered administration. This allowed the brand to continue, save jobs but also leave suppliers out of pocket by an estimated £75 million.
n law establishes a system of voluntary administration, whereby administrators are appointed by a resolution of the board of the relevant company. The Board may appoint an administrator in circumstances where the company is, or will become at some future time, insolvent. In certain circumstances, a liquidator or receiver of an insolvent company may elect to appoint an administrator. Once appointed, the administrator must prepare a report containing recommendations as to whether the company should be returned to the control of the directors, wound up or execute a deed of company arrangement.
Administrators are required to be registered liquidators, and by virtue of their appointment have broad powers to deal with company property. The appointment of an administrator "freezes" any legal proceedings (on foot or anticipated) against the company, and control of the company is given entirely to the administrator. Directors of the company are prohibited from acting in their capacity as directors for the duration of the administration.
While administrators are personally liable for any debts incurred by the company in the course of the administration, they are granted a statutory indemnity against these debts.
The Australian insolvency regime, encompassing administrations, liquidations and receiverships, is the subject of ongoing discussion in respect of law reform.
Insolvency
Insolvency means the inability to pay one's debts as they fall due. Usually used to refer to a business, insolvency refers to the inability of a company to pay off its debts.Business insolvency is defined in two different ways:...
laws of a number of common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions. It functions as a rescue mechanism for insolvent entities and allows them to carry on running their business. The process – an alternative to liquidation
Liquidation
In law, liquidation is the process by which a company is brought to an end, and the assets and property of the company redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation...
– is often known as going into administration. A company in administration is operated by the Administrator (as interim Chief Executive) on behalf of the creditors as a going concern
Going concern
A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...
while options are sought short of liquidation. These options include recapitalising the business, selling the business to new owners, or demerging it into elements that can be sold and closing the remainder.
Canada
The Bankruptcy and Insolvency Act provides mechanisms for consumer and general proposals in order to give time for an insolvent person to be able to reorganize his affairs. For insolvent companies (or affiliated groups) owing more than $5 million, a more flexible regime is available under the Companies' Creditors Arrangements Act ("CCAA).United Kingdom
In United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
law, the administration regime is governed by the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
, as amended by the Enterprise Act 2002
Enterprise Act 2002
The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy.-Structure:*Part 1 The Office of Fair Trading...
. An "administrator" can be appointed without petitioning the court by the holder of a floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
(created since 15 September 2003), by the company or by its directors. Other creditors must petition the court to appoint an administrator. The administrator must act in the interests of all the creditors and attempt to rescue the company as a going concern
Going concern
A going concern is a business that functions without the threat of liquidation for the foreseeable future, usually regarded as at least within 12 months.-Definition of the 'going concern' concept:...
. If this proves impossible he or she must work to maximise the recovery of the creditors as a whole. Only then may the administrator attempt to realise property in favour of one or more secured creditor. Administration is analogous to going into "Chapter 11
Chapter 11, Title 11, United States Code
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
" in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, although there are certain key differences, mainly stemming from the fact that English law does not include the debtor in possession
Debtor in possession
A debtor in possession in United States bankruptcy law is a person or corporation who has filed a bankruptcy petition, but remains in possession of property upon which a creditor has a lien or similar security interest...
concept. During the reorganisation period, as a result, the administrator usually runs the business rather than the directors, and any additional liquidity requirements effectively have to be met by funds provided by existing creditors rather than by any super-senior 'DIP financing'.
The administrator is an officer of the court and an agent of the company, and is not personally liable for any contracts she or he makes on behalf of the company. He has the power to do anything necessary or expedient for the management of the affairs, business and property of the company.
The new administration regime introduced by the Enterprise Act 2002 replaces the previous situation where administrative receivership was available as an alternative to administration, which has traditionally been a more rescue-oriented insolvency regime. This regime allowed the holder of a floating charge
Floating charge
A floating charge is a security interest over a fund of changing assets of a company or a limited liability partnership , which 'floats' or 'hovers' until conversion into a fixed charge, at which point the charge attaches to specific assets...
to appoint an administrative receiver to realise assets in his favour, and also to block an administration order sought by a borrower. This was felt to be too favourable to the floating charge holder at the expense of other creditors. Holders of a floating charge created prior to 15 September 2003 retain their right to appoint an administrative receiver, but all purported rights to do so created after that date will be construed as rights to appoint an administrator (subject to certain specific, rare exceptions).
A court order is issued that forbids any form of legal or insolvency action without the court's permission. An application to the court for an administration order may be made by the company, the directors, a creditor or any combination of them. The Enterprise Act 2002
Enterprise Act 2002
The Enterprise Act 2002 is an Act of the Parliament of the United Kingdom which made major changes to UK competition law with respect to mergers and also changed the law governing insolvency bankruptcy.-Structure:*Part 1 The Office of Fair Trading...
amended the Insolvency Act 1986
Insolvency Act 1986
The Insolvency Act 1986 is an Act of the Parliament of the United Kingdom that provides the legal platform for all matters relating to personal and corporate insolvency in the UK.-History:...
to provide an out-of-court process to appoint an administrator to the holder of a floating charge or the company or its directors. This is considerably cheaper and simpler than the previous system, which involved an application to court.
Administration order
In the UK, an administration order is a process designed to protect limited companies from their creditors while a debt restructuring plan is carried out and presented to creditors and courts. This administration order process requires a licensed insolvency practitionerInsolvency practitioner
In the United Kingdom, only an authorised or licensed Insolvency Practitioner may be appointed in relation to formal insolvency procedures.Quite often IPs have an accountancy background...
to act as the administrator appointed by the court.
Pre-pack administration
A pre-pack is the process of selling the assets of a company immediately after it has entered administration. It is sometimes the case that the previous directors or management purchase the assets of the company from the administrator and set up a new company.This process has advantages in that it enables the administrator to realise a greater amount for the assets due to business continuity and the goodwill of the company are preserved. The employees of the company are also usually transferred to the new company preserving jobs.
Pre-packs have attracted criticism because of the appearances it gives to unconnected parties that the company has just continued without its creditors. SIP 16 was introduced in January 2009 to assist Insolvency Practitioners in pre-pack cases. It was designed to make the process more transparent for creditors and to ensure that fair value was obtained for the assets.
In November 2009, the Office of Fair Trading announced a study into corporate insolvencies, with particular focus on pre-pack administrations. It will report on whether the insolvency market is operating efficiently, with enough freedom of competition between insolvency practitioners and whether consumers and creditors are being treated as fairly as possible.
A recent example of a pre-pack is the sale of the assets of Cobra Beer
Cobra Beer
Cobra Beers main product is an extra-smooth premium beer with an alcohol strength of 5% volume. The beer was founded in 1989 by Karan Bilimoria, who thought that Britain needed a smoother, less gassy lager, which would appeal to both ale drinkers and lager drinkers alike...
to Coors
Coors Brewing Company
The Coors Brewing Company is a regional division of the world's fifth-largest brewing company, the Canadian Molson Coors Brewing Company and is the third-largest brewer in the United States...
immediately after Cobra Beer entered administration. This allowed the brand to continue, save jobs but also leave suppliers out of pocket by an estimated £75 million.
Individual administration order in England, Wales and Northern Ireland
In this process, a debtor who has enough money left over after priority creditors and essential expenses, may may be able to arrange an individual voluntary arrangement. (Debtors with less serious problems may prefer a debt management plan).Australia
AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
n law establishes a system of voluntary administration, whereby administrators are appointed by a resolution of the board of the relevant company. The Board may appoint an administrator in circumstances where the company is, or will become at some future time, insolvent. In certain circumstances, a liquidator or receiver of an insolvent company may elect to appoint an administrator. Once appointed, the administrator must prepare a report containing recommendations as to whether the company should be returned to the control of the directors, wound up or execute a deed of company arrangement.
Administrators are required to be registered liquidators, and by virtue of their appointment have broad powers to deal with company property. The appointment of an administrator "freezes" any legal proceedings (on foot or anticipated) against the company, and control of the company is given entirely to the administrator. Directors of the company are prohibited from acting in their capacity as directors for the duration of the administration.
While administrators are personally liable for any debts incurred by the company in the course of the administration, they are granted a statutory indemnity against these debts.
The Australian insolvency regime, encompassing administrations, liquidations and receiverships, is the subject of ongoing discussion in respect of law reform.
External links
- HMG Insolvency Service website
- Insolvency Practitioners Association UK website
- IPAA (Insolvency Practitioners Association Australia)
See also
- Administration (British football)Administration (British football)Sports clubs in the United Kingdom, most often in football, sometimes choose to enter administration when they are unable to pay off outstanding debts. Under the Insolvency Act 1986 a business will face a winding up order bringing them to court and if it is shown that a business cannot pay debts as...
- Administrative receivership
- Chapter 11, Title 11, United States CodeChapter 11, Title 11, United States CodeChapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
- ExaminershipExaminershipExaminership is a process in Irish law whereby the protection of the Court is obtained to assist the survival of a company. It allows a company to restructure with the approval of the High Court....
a similar process in the Republic of IrelandRepublic of IrelandIreland , described as the Republic of Ireland , is a sovereign state in Europe occupying approximately five-sixths of the island of the same name. Its capital is Dublin. Ireland, which had a population of 4.58 million in 2011, is a constitutional republic governed as a parliamentary democracy,...