What is Administration? - Definition & Source of law - Benefits & implications

What is Administration 

An Administration is an insolvency process for companies struggling with cashflow issues, and is predominately designed to provide a breathing space from creditor action.  In particular, threats of enforcement action by unsecured creditors using bailiffs, or the repossession of assets by finance companies, can be prevented or delayed by using an Administration.  This then allows the Company, working with a licensed insolvency practitioner, time to come up with a plan to deal with the Company's situation and often rescue the underlying business.

The law and procedure relating to Administrations, and more importantly the procedure, to place a company into Administration is set out at Schedule B1 of The Insolvency Act 1986. 

It is incredibly quick and easy for company directors to place a company into Administration, particularly if there are no Floating Charges or secured creditors. The company can be placed into Administration within a matter of hours.  It is a simple matter of filling out a few forms, which need to be sworn at a solicitor's office.  Those sworn forms are then filed in court and the company will then be in Administration.  The forms are merely stamped by the Court Clerk and given a reference number and therefore there is no need to see a Judge.  They are then later filed at Companies House and sent to the all of the creditors, both secured and unsecured. 

What are the Different Types of Administration 

There are two different types of Administration. 

The first type of Administration is an out of court process, which, by merely filing a document in your local insolvency court, enables the Company to be placed into Administration.  In this type of Administration there is no court hearing and therefore it is very quick, easy and inexpensive to do and therefore is the preferred option.  Unfortunately it is not always possible to use this route. 

The second type of Administration is where a formal application is made to the Court for an Administration Order to be made.  This type of Administration is used when the quicker, out of court process, is unavailable.  For example where a winding up petition has been issued.  This is a much slower and expensive process because solicitors will need to be instructed and the speed of the process is often determined by how quickly a court hearing can be arranged, which can often be a considerable time. 

What are the Effects of Administration 

The main defining effect of an Insolvency Administration Order is that it freezes creditors actions. 

This means that once the company is in Administration:

• landlords cannot distrain on your company's assets and cannot forfeit the lease

• creditors cannot pursue court judgments against your company, or seek to enforce a judgment that they have already obtained

• winding up petitions cannot be issued against your business

• bailiffs cannot seize assets or take "walking possession" of the Company's assets

• HP and lease companies cannot recover their assets

That "freeze" or moratorium on creditors enforcement procedures provided by the Administrator's appointment gives company directors the time needed to consider alternatives and to put a plan in place to rescue the Company's business. The process is, therefore, quite often an interim step to achieve a later objective such as a company voluntary arrangement. In many instances an Administration can, however, stand on its own without necessarily there being a later insolvency process. 

An Administration generally lasts only twelve months, but can be extended in certain circumstances.

An Administration is often used as a "stepping stone" to other insolvency procedures, such as a Company Voluntary Arrangement. 

It can also be used to sell a business, sometimes under a pre-packaged sale agreement, which is often called a pre-pack.  However, a pre-pack requires a significant amount of work upfront, and the requirements of Statement of Insolvency Practice Number 16, or SIP 16, need to be met.  If a pre-pack is being considered, seeking early advice from an insolvency practitioner is required.

If there is a danger that creditors are seeking to take enforcement action against a company, Administration can be a very useful tool to freeze creditors action to allow the directors time to act in the best interests of the company and the creditors as a whole.  If you would like to discuss Administration and the procedure to follow to place a company into Administration please telephone 01326 340 579 to discuss the matter with one of our Insolvency Practitioners. 

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