ANNEX 1 - Administration proceedings before the commencement of the Enterprise Act 2002.

56.2A

This part is divided in to 6 sections.

Section1 - The application for an administration order (paragraphs 56.5A to 56.14A).

Section 2 - The administration order (paragraphs 56.15A to 56.21A).

Section 3 - The powers of the administrator (paragraphs 56.22A to 56.29A).

Section 4 - The duties of the administrator (paragraphs 56.30A to 56.38A).

Section 5 - The outcome of the administration (paragraphs 56.39A to 56.41A).

Section 6 - Subsequent winding-up proceedings (paragraphs 56.42A to 56.50A).

The administration procedure was introduced by the Insolvency Act 1986 to provide a company facing financial difficulties with a breathing space during which time a rescue package or a scheme for the more advantageous realisation of assets could be put in place. The provisions relating to administrations are contained in Part II of the Act and Part 2 of the Rules.

During the period of administration, the company will be managed by ‘the administrator’ (see paragraph 56.15A) and there will be a moratorium on actions against the company (see paragraph 56.13A).

Aims and objectives

56.4A

Administration orders are intended primarily to facilitate the rescue and rehabilitation of insolvent but potentially viable businesses. An administrator’s objective is to consider and effect the reorganisation of a company in order to restore profitability and to carry on its business, in whole or in part, and/or to make proposals for a more advantageous realisation of its assets than might occur on liquidation. It is important that this aim is not frustrated by expense and that the costs of obtaining an administration order should not operate as a disincentive or put the process out of reach of smaller companies.

SECTION 1 - Administration

[s8(3)]

56.5A

The purposes of an administration order are:

(a) the survival of the company, and the whole or any part of its undertaking, as a going concern;

(b) the approval of a voluntary arrangement under Part I of the Act, Company Voluntary Arrangements (see Part 5);

(c) the sanctioning under section 425 of the Companies Act 1985 of a compromise or arrangement between the company and any such persons as are mentioned in that section; and

(d) a more advantageous realisation of the company's assets than would be effected on a winding up.

The order must specify the purpose or purposes for which it is made.

In establishing whether any of the statutory purposes is likely to be achieved the court will consider whether there is a ‘real prospect ‘ of achieving that purpose (Re Harris Simons Construction Limited [1989] WRL 36). Even if the statutory conditions are satisfied the court has discretion as to whether to make the order and will not make an order unless all the circumstances justify the making of the order.

56.6A

The administration procedure applies to companies formed and registered under the Companies Act 1985 or an earlier Companies Act. The court may make an administration order in relation to any company that the court is satisfied is, or is likely to become, unable to pay its debts and where it considers that the administration order would be likely to achieve one or more of the statutory purposes (see paragraph 56.5A).

56.7A

An administration order cannot be made where the company has gone into liquidation. Additionally an administration order under section 8 may not be made against -

• an insurance company within the meaning of the Insurance Companies Act 1982, as these companies have their own special legislation,

[s426]

• (subject to the EC Regulation on Insolvency Proceedings) a foreign company, though it may be put into administration where a request for assistance under section 426 - (co-operation between courts) has been granted.

The Railway Administration Order Rules 2001 (SI 2001/3352)

• a licenced railway company, which has it own procedure outlined in The Railway Administration Order Rules 2001.

Banks (Administration Proceedings) Order 1989 (SI 1989/1276)

Section 8 originally excluded banks and other authorised institutions under the Banking Act 1987 from the administration procedure. However, the Banks (Administration Proceedings) Order 1989 (SI 1989/1276) extended the procedure, with modifications, to banks and other authorised institutions under the Banking Act 1987. The Building Societies Act 1997, section 39, applied the administration procedure to building societies.

[Partnerships Order 1994]

56.8A

A partnership can apply for an administration order under the Insolvent Partnerships Order 1994, article 6 (see paragraph 53.53).

Who may apply for an administration

56.9A

All or any of the following parties can make an application for an administration order -

[s9(1)]

• the company;

• all the directors acting together;

• a creditor or creditors (including any contingent or prospective creditor);

• the clerk of a magistrates court exercising powers under the Magistrates’ Court Act 1980, section 87A (enforcement of fines imposed on companies);

[s7(4)]

• the supervisor of a voluntary arrangement;

[Financial Services Act 1986 s74]

• the Financial Services Authority;

• The Secretary of State for Trade and Industry;

[Banks (Administration Proceedings) Order 1989 (SI No 1276)]

• The Bank of England.

[r2.1 to 2.8]

56.10A

The application for an administration order is made by a petition, supported by an affidavit, which must be filed at court and served on those persons listed in Rule 2.6(2).

Where the official receiver is provisional liquidator

56.11A

If the official receiver is acting as provisional liquidator of a company in relation to which an administration petition is issued he will be served with a copy of the petition and should ensure that he is present or legally represented at the hearing. If an administration order is made the official receiver will need to seek directions from the court on how to proceed under the order by which he was appointed.

[r2.2, r2.316]

The petition for the administration order may be supported by a report by an independent person to assist the court to determine whether the application has a sound basis, but if no report is prepared an explanation as to why it has not been prepared must be provided. The report will usually be prepared by the proposed administrator and should provide an assessment of the company’s financial position and the prospects of the administration order’s purpose(s) being achieved. Although it is not compulsory the absence of a report has resulted in the refusal of the application for the administration order (Re W F Fearman Limited (1998) 4 BCC 139).

Effect of application for administration order

56.13A

Unless an administrative receiver has already been appointed (see paragraph 56.14A) the presentation of the petition for an administration order triggers a statutory moratorium. The moratorium has a general freezing effect on creditors’ rights but does not destroy them. The creditor can at any time apply to the court for leave to enforce those rights. Once the petition for an administration order has been presented-

[s10(1)(a)]

• no resolution may be passed or order made for the winding up of the company;

[Insolvency Act 2000 s9]

• from 2 April 2001, no landlord or any other person to whom rent is payable may exercise any right of forfeiture by peaceable re-entry in relation to premises let to the company in respect of a failure by the company to comply with any term or condition of its tenancy of such premises, except with the leave of the court and subject to such terms as the court may impose;

[s10(1)(b)]

• no steps may be taken to enforce any security over the company's property, or to repossess goods in the company's possession under any hire-purchase agreement, except with the leave of the court and subject to such terms as the court may impose; and

[s10(1)(c)]

• no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the leave of the court and subject to such terms as the court may impose.

The following do not require the leave of the court during the period beginning with the presentation of the petition for an administration order and ending with the making of such an order:

• the presentation of a petition for the winding up of the company. A creditor may wish to oppose an application for an administration order and have the company put into liquidation instead. Section 10(2)(b) confirms he is free to present the petition to wind up but it is likely that the court would wish the administration and liquidation petitions to be heard together and the leave of the court would be required for the proceedings to be joined. The court may restrain the petitioning creditor from advertising the winding-up petition until after the hearing of the administration petition (Re A Company No 001448 of 1989 (1989) 5 BCC 706);

[s10(2)(b)]

• the appointment of an administrative receiver of the company; or

[s10(2)(c)]

• the carrying out by such a receiver (whenever appointed) of any of his functions.

[s10(3)]

56.14A

Where an administrative receiver has been appointed prior to the petition for the administration order, the moratorium period does not start unless and until the debenture holder gives his consent to the administration order being made.

SECTION 2 - THE ADMINISTRATION ORDER

[s13]

56.15A

The administrator is appointed by the administration order, or by a subsequent order of the court if a vacancy occurs. He is an officer of the court, subject to its direction and must also be an insolvency practitioner. Two or more persons may be appointed joint administrators.

[s11]

On the making of an administration order:

• any petition for the winding up of the company must be dismissed;
  

• any administrative receiver of the company must vacate office; and
  

• any receiver of part of the company's property must vacate office on being required to do so by the administrator.

During the period for which an administration order is in force the moratorium imposed on the presentation of the petition continues and additionally no administrative receiver of the company may be appointed. When the administration order has been made the creditors may enforce their rights against the company with the consent of the administrator rather than having to apply to court.

Despite this there is a significant amount of case law dealing with the effect of an administration order on the rights of creditors. One leading case is Atlantic Computer Systems Plc [1992] Ch 505. The conclusion drawn from this case is that the moratorium is intended to assist the company to achieve the purposes of the administration order. The decision to grant leave to take action against the company - for example, for the repossession of goods on hire-purchase - must strike a balance between the interests of the hiring owner and the interests of the general body of creditors. Each case will be decided on its merits.

[s9(3) and s10(2)(b)]

56.17A

A debenture holder who is entitled to appoint an administrative receiver can effectively veto an administration order being made. The legislation provides that there cannot be an administrator and administrative receiver in office at the same time. Where an administrative receiver is in office the court will dismiss the administration petition, unless the debenture holder has consented to the administration order or the court is satisfied that the security was void or otherwise open to challenge.

[s11(5)]

56.18A

Where the debenture holder has consented to the making of an administration order any administrative receiver will vacate office on the making the order, and surrender all assets to the administrator. An administrative receiver has a charge on the assets in respect of his remuneration and expenses or any indemnity to which he is entitled out of the assets of the company. On the making of an administration order he is discharged from his duty to pay preferential debts.

56.19A

Creditors comprising one-tenth in value of the company’s creditors can request an administrator to convene a meeting of creditors.

A creditor or member may apply to the court if he considers that the management of the company’s affairs, business or property by the administrator, is unfairly prejudicial to the interests of its creditors or members generally, or part of them (including the applicant) or that any proposed act or omission would be so prejudicial. The court can make any order it thinks fit that would not prejudice or prevent the implementation of a voluntary arrangement or the approved proposals.

56.20A

Under section 19(6) the administrator is taken to adopt an employee’s contract of employment if the employee continues in the employment of the company for more than 14 days after the appointment of the administrator. The liabilities incurred under employment contracts adopted by the administrator rank ahead of the administrator’s claims for remuneration and expenses. Liabilities under employment contracts adopted by an administrator are restricted to liabilities in respect of services provided during the period of the administration (by employees whose contracts of employment have been adopted by the administrator on or after March 1994).

[s12]

56.21A

During the period of the administration every invoice, order for goods or business letter which bears the company’s name must also contain the administrator’s name and a statement that the company’s affairs are being managed by him.

SECTION 3 - POWERS OF AN ADMINISTRATOR

General power to manage [s14(1) & (5)] [Schedule 1]

56.22A

The administrator is the company’s agent and has a general power to do all things necessary for the management of the company’s affairs. A number of specific powers are set out in Schedule 1 to the Act but they are not restrictive. Generally, anything that the company or its directors could do the administrator also has power to do. This general power extends to the disposal of assets and the administrator is not required to wait until creditors have approved his proposals before disposing of the company’s property (Re T & D Industries PLC and Another [1999] All ER (D) 1239).

Additional powers

[s14(2) & (4)]

56.23A

The administrator has the power to remove any director of the company or appoint a new director and can call any meeting of the members or creditors of the company. Where any power of the company or its directors could interfere with the administrator’s powers, those powers cannot be exercised without the consent of the administrator. The directors, however, retain their duties under the Companies Act 1985 to keep accounting records and file accounts and returns.

[s233]

56.24A

The administrator may request the supply of gas, electricity, water and telecommunications services, from a public supplier during the period of the administration without being required to pay charges outstanding at the date of the administration order.

[s234]

56.25A

The court may order any person who has any property, books, papers or records to which the company appears entitled to surrender those items to the administrator.

[s235, s236 and s237]

56.26A

The officers of the company have a statutory duty to provide information to the administrator and in the event of their non-cooperation he may request they be privately examined.

[s423, s238, 239 s244 and s245]

56.27A

The administrator can apply to court for an order that any transactions entered into by the company at an undervalue, or by way of a preference or an extortionate credit transaction be set aside. Certain floating charges created within 12 months of the administration order could also be declared invalid. (Further details of antecedent transactions can be found in Chapter 31.4).

[s15(5)(b)]

56.28A

An administrator has wide-ranging powers to deal with and dispose of charged property.

Property which is subject to a floating charge may be dealt with by the administrator as if it were unencumbered and without the consent of the debenture holder(s) or the court. After such disposal the debenture holder retains his priority in respect of payment from the sale proceeds.

Property which is subject to a fixed charge, including goods subject to hire-purchase and retention of title agreements, may be disposed of by an administrator without the consent of the owner or charge-holder if he has the leave of the court. The net sale proceeds must be used to pay the former owner or the amount due to the secured creditor. If there is a surplus, the balance will go to the general company funds. If there is a shortfall, the amount due will be an unsecured debt, unless the sale was below market value, when the difference between the sale proceeds and the market value as determined by the court must be paid to the former owner or the charge-holder from the administration funds.

Distribution to creditors

The administrator does not have an express statutory power to make distributions to creditors. He would need to use a voluntary arrangement, scheme of arrangement or liquidation in order to distribute funds. Exceptionally the court may permit him to pay creditors for example where the payment was necessary for the survival of the company as a going concern (Re John Slack Limited [1995] BCC1116).

SECTION 4 - DUTIES OF THE ADMINISTRATOR

56.30A

The administrator of the company must, on his appointment, take into his custody or under his control all of the property of the company and manage its affairs, business and property. He is an officer of the company and owes the company a duty of care which extends to the manner and timing of his disposal of the company’s assets. He will be personally liable for any loss suffered by the company if he breaches that duty. His conduct will be judged by the standards of a professional insolvency practitioner of ordinary skill (Re Charnley Davies Limited [1990] BCC 605).

[s22; Form 2.9] [r2.11 and r2.14]

56.31A

The administrator must require the submission of a statement of affairs of the company from the present or former officers of the company or any of the parties specified in section 22(3) within 21 days. The administrator may release any person from this obligation if he thinks fit.

[s23; r2.16 and r2.17]

56.32A

The administrator must, within 3 months or such longer period as the court may allow, prepare his statement of proposals for achieving the purposes of the administration. This statement must be sent to the Registrar of Companies, all known creditors and all members of the company. It must also be laid before the meeting of creditors called for that purpose (see paragraph 56.33). There is no statutory guidance as to the content of the proposals which are left entirely to the administrator’s commercial judgement.

[s24 and r2.18]

56.33A

The administrator must call a meeting of creditors to consider his statement of proposals, giving not less than 14 days’ notice. The meeting must be held within three months of the administration order unless the court orders otherwise.

[s24 and r2.28]

At that meeting the creditors may approve the proposals as a whole, with modifications if agreed by the administrator, or reject the proposals. A resolution to approve or reject the proposals is passed when a majority in value of the creditors present and voting have voted in favour of it.

[s26 and r2.32 to r2.46]

If it has approved the proposals, the creditors’ meeting may establish a creditors’ committee to assist the administrator in his duties and provide a line of communication between the administrator and the creditors. The creditors’ committee can require a meeting with the administrator, at seven days’ notice, at which he must provide such information as they may reasonably require.

[s24(4)]

56.34A

After the conclusion of the creditors’ meeting the administrator must report the result of the meeting to the court and give notice of the result to the Registrar of Companies and all known creditors.

[s25]

56.35A

If the administrator’s proposals are approved he will carry on as administrator within the scope of those proposals. If the administrator wishes to substantially revise his proposals he must call a further meeting of creditors to approve the revised proposals.

Failure to approve the proposals [s24(5)]

56.36A

If the meeting of creditors does not approve the proposals the court may discharge the administration order, or adjourn the hearing, conditionally or unconditionally, or make an interim order or other order as it thinks fit. The court can allow the administration to continue but, in practice, if an administrator is unable to produce proposals acceptable to the creditors, the company will be forced into another form of insolvency proceedings.

[Forms D6 and D7]

56.37A

Administrators have a duty to report to the Secretary of State for Trade and Industry on the conduct of directors and shadow directors. The official receiver can check what type of report has been submitted on LOIS and may obtain sight of any adverse report, on a confidential basis, by contacting Disqualification Unit.

[r2.52]

56.38A

The administrator must file receipts and payments accounts with the court, the Registrar or Companies and each member of the creditors’ committee (if any) for every six month period from his appointment and on ceasing to act. The accounts must be filed within two months of the period end, unless the court extends the period on the administrator’s application.

SECTION 5 - THE OUTCOME OF THE ADMINISTRATION

Discharge of administration order

The administrator may at any time apply to the court for the administration order to be discharge or varied if -

[s18]

• it appears to him that the purpose or each of the purposes specified in the order either has been achieved or is incapable of achievement, or

• he is required to do so by a meeting of the company’s creditors.

Where the administration has been a success, and the company’s survival assured, the discharge will enable the control of the company to be restored to its directors (part of the survival plan may have involved the removal of some or all of the existing directors) and shareholders and the administrator will be released.

[s5(3)]

Where the purpose of the administration is the approval of a voluntary arrangement, the administrator will be able to obtain his discharge as soon as the meetings of the company and its creditors have approved the arrangement. The voluntary arrangement will then take effect under the control of the supervisor (who may be the administrator).

Where the purpose of the administration cannot be achieved or the purpose was a more advantageous realisation of assets liquidation is likely to follow the discharge of the administrator (see paragraphs 56.42A to 56.50A).

The administrator will vacate office when the administration order is discharged. He may, at the time of applying for the discharge of the order, also apply for his release. Release discharges the administrator from all liability in respect of his acts or omissions, except if there appears to have been any misfeasance or a breach of fiduciary duty actionable under section 212. Whilst the court does have the power to grant a release immediately upon the discharge of the administration order the usual practice in England and Wales, where liquidation is to follow the administration, is to postpone the release to allow an investigation into the conduct of the administration to take place (Re Exchange Travel (Holdings) Limited [1992] BCC954). Where there is a proper claim against an administrator, the court will not grant a release (Re Barclays Mercantile Business Finance Ltd v Sibec Developments Ltd [1992] 1 WLR 1253).

[r2.54]

Where an administrator has died he has his release from the time at which notice of his death is given to the court under rule 2.54 or such time as the court may determine.

The administrator’s remuneration is fixed, in the first instance, by the creditors’ committee. If there is no creditors’ committee, the creditors as a whole may fix the remuneration, either at the meeting to approve the proposals, or at a meeting called for the purpose of fixing the remuneration. The remuneration will be fixed either as a percentage of the assets with which he has to deal, or by reference to the time spent by him, or his staff, on matters relating to the administration. In fixing the remuneration the creditors must have regard to the complexity of the case, any exceptional responsibility that falls on the administrator, the effectiveness of the administrator and the value and nature of the property with which he has to deal.

[r2.47(6)]

If the creditors do not fix the remuneration the administrator can make an application for the court to fix it.

[r2.48 and 2.49]

If the administrator considers that the remuneration fixed for him by the creditors’ committee is too low he may request that it be increased by resolution of the creditors. If he is still unhappy he can apply to the court to have it further increased. Neither the creditors nor the court have the power to decrease the remuneration in this procedure.

[r2.50]

Any creditor of the company who considers the administrator’s remuneration is excessive can, with the support of at least 25% in value of the creditors apply to the court for the remuneration to be reduced. The court can either dismiss the application, after a hearing, or make an order that the remuneration be fixed at a reduced rate.

SECTION 6 - SUBSEQUENT WINDING-UP ORDER

56.42A

Where the administration fails to return the company to solvency it is likely that liquidation will follow. Administration and winding-up orders cannot run concurrently, only consecutively. A petition for winding-up presented prior to the making of an administration order cannot rest on the court file during an administration since such petitions are dismissed on the making of the order and whilst the administration order is in force a petition to wind-up cannot be presented without the leave of the court.

Form 4.12]

If an administrator wishes a compulsory liquidation to follow on from the administration, he should present a petition for winding-up on behalf of the company as its administrator. The petition must contain an application under section 18 of the Act for the discharge of the administration order.

[s10(1)(a)]

Where an administrator is applying for the discharge of an administration order and a creditor is seeking a winding-up order the creditor must obtain the leave of the court to present a winding-up petition. This should be returnable on the date set to hear the administrator’s application for the discharge of the administration order so that a winding-up order can be made immediately on the discharge of the administration order.

Voluntary liquidation following administration

56.43A

The commencement of voluntary liquidation after administration faces two problems:

(1) A resolution for winding up cannot be passed while an administration order is in force and an effective resolution by the members for a voluntary winding up therefore has to await discharge of the order. This can be overcome by;

• the order discharging the administration being made conditional upon the passing of the winding-up resolution (Re Norditrack (UK) Ltd, [2000] 1 W.L.R. 343; [2000] 1 All E.R. 369; [2000] 1 B.C.L.C. 467; [2000] B.C.C. 441); or
  

• the winding-up resolution being passed first but conditional upon discharge of the administration (Re Dino Music Ltd, [2000] B.C.C. 696). The court in Norditrack (UK) Ltd has however, cast doubt the effectiveness of this procedure.

[s387(3)]

(2) Where administration is followed by a voluntary liquidation the relevant date for the calculation of preferential claims is the date of the resolution to wind up (whereas where a compulsory liquidation immediately follows an administration the relevant date is the date of the administration order). This could disadvantage preferential creditors whose claims may be greater when calculated from the earlier date. The court may require the agreement of any preferential creditors whose status may be affected before making an order as in (1) above (Re Philip Alexander Securities and Futures [1998] BCC 819).

[s140(1)]

56.44A

The court may appoint the administrator as liquidator of the company on the making of the winding-up order.

Initial action by official receiver on making of winding-up order.

56.45A

When the winding-up order is made the official receiver should write to the former administrator to obtain copies of -

• the statement of affairs,

• the proposals,

• the affidavit and any report lodged in support of the petition which might contain useful information regarding the company’s affairs.

[s235]

56.46A

The administrator is both an agent and an officer of the company and has a duty to co-operate with the current office holder. The official receiver may require the attendance for interview of any of the officers of the company.

Official receiver’s duties where the administrator becomes the liquidator

56.47A

Where the court appoints the former administrator as liquidator on the making of the winding-up order, the official receiver remains under a duty to -

[s132]

• investigate the company’s affairs;

[r4.21(4)]

• give notice of, and advertise and gazette the order;

[r4.43]

• provide information to creditors and members (but not to hold first meetings); and

Forms D1 and D3]

• to fulfil his reporting duties under the Company Directors Disqualification Act 1986. The official receiver should bear in mind that an application for a disqualification order should be made within 2 years from the date of the first appointment of an office holder (see Technical manual Volume 2 Chapter 222 paragraph 222.4(c)). The leave of the court is required for the bringing of proceedings outside this period.

56.48A

Where the official receiver is liquidator of a company and the former administrator applies to the court to fix his (the administrator’s) remuneration, the court or the applicant may request the official receiver to attend the hearing. The official receiver should attend and is entitled to the costs of doing so. The costs should be paid by the applicant and may be calculated on a time and rate basis. Where neither the official receiver nor the former administrator is liquidator of the company, the official receiver should suggest that it would be more appropriate for the liquidator to attend the hearing.

[s212]

If the official receiver becomes aware that the administrator has received remuneration and expenses before creditors with claims under contracts covered by section 19(5) (see paragraph 56.50A), this should be brought to the attention of the court as it might be relevant in determining whether the former administrator’s release is appropriate. Consideration should also be given to whether these monies are recoverable where there has been a possible breach of duty.

s245(5)(a)]

56.49A

Where a winding-up order is made immediately following the discharge of an administration order, the relevant date for the calculation of preferential claims in the winding up is the date of the administration order and the period in respect of which transactions at an undervalue and preferences may be ‘attacked’ by the liquidator is calculated from the date of the presentation of the administration petition, not the petition which leads to the winding-up order.

[s19(5)]

56.50A

The order of payment of expenses of the administration following the winding up is as follows:

(1) Debts and liabilities incurred under contracts entered into by an administrator, or under adopted employment contracts (see paragraph 56.20), rank ahead of the administrator’s remuneration and expenses properly incurred by him. If there are insufficient assets to pay the debts, except those for which the administrator is personally liable, creditors under such contracts will be creditors in any subsequent liquidation (Re Sheridan Securities Ltd (1988) 4 BCC 200). Where the unpaid administration creditors and the administrator’s remuneration and expenses exceed the value of the assets at the date of the winding-up order, the official receiver as liquidator should advise the administrator and the administration creditors that he intends to take no action as regards the assets charged with the payment of these liabilities and that they should seek to deal with them. Such action may require the former administrator to make an application to the court for directions.

[s19(4)]

(2) The remuneration and expenses of the administrator.

[s115]

(3)Thereafter the priority of costs and claims follow the normal order of priority in a liquidation.