FAQ UK Administration

Administration
a guide for unsecured creditors Association of Business Recovery Professionals
ADMINISTRATION
Administration When a
company is facing financial
difficulties it can be placed
into administration. This
means that the affairs,
business and property of
the company will be
managed by a person
appointed for that
purpose.
A licensed insolvency practitioner has given you this
because you, or your business, may be owed money
by a company that is in administration.
This guide aims to help you understand your rights
as a creditor and to describe how best these rights can
be exercised. It is intended to relate only to England
and Wales. It is not an exhaustive statement of the
relevant law or a substitute for specific professional or
legal advice.
We have made every effort to ensure the guide is
accurate, but R3 cannot accept responsibility for the
consequences of any action you take in reliance on its
contents. If, having read the guide, you remain in any
doubt about your rights, you should consult a licensed
insolvency practitioner or solicitor.
Depending on the circumstances of the case,
creditors who play an active role in an insolvency can
make a significant difference to how much the
insolvency practitioner will be able to recover for
them. We hope that you will read this guide carefully
and consider whether taking an active role as a
creditor in this case could benefit you or your business.
ADMINISTRATION

In what circumstances does a company find itself in
administration?
When a company is facing financial difficulties it can be placed into
administration. This means that, during the period for which it is in
administration, the affairs, business and property of the company
will be managed by a person (‘the administrator’) appointed for that
purpose. The administrator must be a licensed insolvency
practitioner.
How can a company be placed into administration?
A company may be placed into administration:
by an order of the court, on application by, amongst others, the
company, its directors, one or more creditors, or, if it is in
liquidation, its liquidator;
without a court order, by the direct appointment of an
administrator by the company, its directors or a creditor who
holds comprehensive security of a type which qualifies him to
make such an appointment.
What is the purpose of administration?
The administrator must perform his functions with the objective of:
rescuing the company as a going concern, or
achieving a better result for the company’s creditors as a whole
than would be likely if the company were wound up (without
first being in administration), or
realising property in order to make a distribution to one or more
secured or preferential creditors.
The administrator must perform his functions with the first of these
objectives unless he thinks either:
that it is not reasonably practicable to achieve that objective, or
that the second objective would achieve a better result for the
company’s creditors as a whole.
The administrator may perform his functions with the third objective
only if:
he thinks that it is not reasonably practicable to achieve either of
the first two objectives, and
he does not unnecessarily harm the interests of the creditors of
the company as a whole.
How does administration come to an end?
An administration may come to an end:
automatically after one year – but this period may be extended
with the agreement of the creditors or the permission of the
court if more time is needed to achieve the purpose of
administration;
by court order, if the administrator thinks the purpose of
administration cannot be achieved, or, where he was appointed
by the court, if he thinks the purpose has been achieved;
where the administrator was appointed out of court, if he thinks
the purpose has been achieved.
On conclusion of an administration:
the company may be returned to the control of its directors and
management;
the company may go into liquidation;
the company may be dissolved (if there are no funds for
distribution to unsecured creditors);
if a voluntary arrangement has been agreed during the
administration, the arrangement may continue according to its
terms (it is possible for a voluntary arrangement to run
concurrently with an administration).
Is the administrator bound by contracts entered into by
the company prior to his appointment?
An administrator has a general duty to the company to attempt to
achieve the purpose of administration. In doing so, the
administrator may find it impractical to have the company perform
certain contracts entered into prior to his appointment, although he
will have regard to the financial implications of breaches of the
company’s contracts. Special provisions apply to employment
contracts.
Is the administrator liable for sums due under contracts
entered into by the company subsequent to his
appointment?
An administrator is not personally liable for contracts entered into
as administrator, but normally the administrator will pay for goods
or services provided subsequent to his appointment, as an expense
of the administration.
What are the powers of an administrator?
An administrator’s powers are very broad. They
include powers to carry on the company’s
business and realise its assets. The
administrator displaces the company’s board of
directors from its management function and
has the power to remove or appoint directors.
The administrator must prepare proposals for
approval by the creditors setting out how he
intends to achieve the purpose of
administration.
Does the administrator pay unsecured
creditors the money owed to them?
Debts due to unsecured creditors are frozen at
the date of the administrator’s appointment.
If the outcome of the administration is survival
of the company, the management of the
business and assets can be returned to the
directors on the conclusion of the administration.
The directors and staff of the company will then
deal with unsecured creditors’ pre-appointment
claims.
If survival of the company is not possible, but
sufficient sums are realised from the sale of the
company’s business and assets to enable funds to
be distributed to unsecured creditors, the
administrator may be able to deal with their
claims and pay them a dividend, but he may only
do so with the permission of the court.
Otherwise, after payment of the costs and
expenses of the administration, any surplus funds
will normally be passed to a liquidator, who will
deal with creditors’ claims. The administrator
may himself become the liquidator.
Sometimes the outcome of the administration
will be a company voluntary arrangement, within
which creditors’ claims will be dealt with.
Six months after writing off a debt in your accounts, you can
claim VAT Bad Debt Relief from HM Customs and Excise for the VAT
you have paid.
If you believe that you own something in the company’s
possession, you should contact the administrator as soon as possible
with full proof of ownership and be prepared to identify what you
are claiming. The administrator will examine your claim carefully
before deciding whether to release the goods in question, pay you
for them or otherwise.
The
administrator
displaces the
company’s
board of
directors from
its
management
function and
has the power
to remove or
appoint
directors
Debts due to
unsecured
creditors are
frozen at the
date of the
administrator’s
appointment
Six months
after writing
off a debt you
can claim VAT
Bad Debt
Relief from
HM Customs
and Excise
If you own
something in
the company’s
possession,
you should
contact the
administrator
as soon as
possible
How is the administrator’s fee determined?
The creditors’ committee (if there is one) agrees the administrator’s
fee. Otherwise, it can be fixed by the creditors or the court.
Although the fee can be fixed as a percentage of the value of the
property dealt with, it is normally based on the following factors:
the time properly spent by the administrator and his staff;
the complexity of the case;
any exceptional responsibility borne by the administrator;
the effectiveness with which the administrator carries out his duties;
and
the value and nature of the company’s assets.
R3 has produced a separate guide explaining insolvency office
holders’ remuneration, which is available from the person who
gave you this guide.
What should I do if I am dissatisfied with the
administrator’s handling of the case?
You should first contact the administrator to try to resolve the
problem. If you are still not satisfied, you may be able to make an
application to court.
If you think that the administrator is guilty of professional
misconduct, you should contact his regulatory body.
ADMINISTRATION
7
As an unsecured creditor, what information am I entitled
to?
The administrator must notify all known creditors of his
appointment as soon as reasonably practicable, and must send a
copy of his proposals for achieving the purpose of administration to
all creditors within eight weeks of his appointment. A meeting of all
creditors must then normally be held within ten weeks of the date
the company went into administration in order to consider the
administrator’s proposals. However, there is no need for the
administrator to hold a meeting if he has stated in his proposals
that:
the company has sufficient property to enable all creditors to be
paid in full;
the company has insufficient property to enable a distribution to
be made to unsecured creditors except out of the reserved fund
which may have to be set aside out of floating charge assets; or
neither of the first two purposes of administration can be
achieved.
However, he must hold a meeting if requested by creditors whose
debts amount to at least 10% of the total debts of the company.
After approval of the administrator’s proposals, a report on the
progress of the administration is sent to all creditors every six
months and at the end of the administration.
Can the unsecured creditors form a creditors’ committee?
Yes. A creditors’ committee may be appointed at a meeting of
creditors and must consist of at least three and not more than five
creditors. The creditors’ committee receives reports from the
administrator and may meet periodically.
Creditors’ committee members are not paid, but will receive their
reasonable travelling expenses as a cost of the administration.
Can a creditor initiate or continue legal actions against a
company in administration?
No. Any petition for the winding up of the company must be
dismissed or suspended. In addition, except with the consent of the
administrator or the permission 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 any sale or hire agreement;
no other proceedings, execution, or legal process may be
commenced or continued, and no distress may be levied, against
the company or its property; and
a landlord may not exercise a right of forfeiture in relation to
premises let to the company.
ADMINISTRATION
6
R3 is the UK’s leading trade association for licensed insolvency
practitioners and business recovery professionals. R3 does not
license or discipline its members; this is the responsibility of the
practitioner’s regulatory body. The regulatory bodies are:
The Association of Chartered Certified Accountants
Tel: 020 7396 7000 www.accaglobal.com
The Institute of Chartered Accountants in England and Wales
Tel: 020 7920 8100 www.icaew.co.uk
The Institute of Chartered Accountants in Ireland
Tel: 00 353 1 637 7200 www.icai.ie
The Institute of Chartered Accountants of Scotland
Tel: 0131 347 0100 www.icas.org.uk
The Insolvency Practitioners Association
Tel: 020 7623 5108 www.ipa.uk.com
The Law Society of England and Wales
Tel: 020 7242 1222 www.lawsoc.org.uk
The Law Society of Northern Ireland
Tel: 028 9023 1614 www.lawsoc-ni.org
The Law Society of Scotland
Tel: 0131 226 7411 www.lawscot.org.uk
The Insolvency Service
Tel: 020 7291 6895 www.insolvency.gov.uk
Further advice and information for creditors of failing businesses is
contained in R3’s Ostrich’s Guide to Business Survival, which can be
downloaded from the R3 website www.r3.org.uk free of charge.
This and other Creditors Guides are produced by R3, the Association of
Business Recovery Professionals, 8th Floor, 120 Aldersgate Street,
London EC1A 4JQ. Tel 020 7566 4200 Fax 020 7566 4224
email association@r3.org.uk
No part of this guide may be reproduced, stored in a retrieval system, or transmitted in
any form or by any means, electronic, mechanical, photocopying or otherwise, without
the prior written permission of the Association of Business Recovery Professionals.
R3 is a registered trademark of the Association of Business Recovery Professionals.
Association of Business Recovery Professionals
8th Floor
120 Aldersgate Street
London EC1A 4JQ
Tel 020 7566 4200
Fax 020 7566 4224
email association@r3.org.uk www.r3.org.uk

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