Solving Insolvency Series 1: The Administration Process

Administration is an insolvency procedure that allows a company in financial distress to continue trading while options for rescue or restructuring are explored. The administration regime can be found in Schedule B1 to the Insolvency Act 1986 (“IA 1986”).

The purpose of this article is to provide an overview of the administration process for a broad understanding and is by no means an exhaustive account.

Commencement

1. The administration process commences with appointing an administrator, who takes control of the company’s affairs. The administrator is a licensed insolvency practitioner (“IP”) who has their own duties and statutory obligations, as they are classified as officers of the court.

2.  A company can enter administration through three primary routes:

a. Court Order – a court application can be made by the company, its directors, or one or more creditors. The court must be satisfied that the company is (or is likely to become) unable to pay its debts, and that administration is likely to achieve one of the statutory objectives.

b. Out-of-Court Appointment by the Company or its Directors – the company or its directors can appoint an administrator without court involvement. This route necessitates filing a Notice of Intention to Appoint an administrator at court and providing copies to any qualifying floating charge holders. The notice must also be published in the London Gazette.

c. Out-of-Court Appointment by a Qualifying Floating Charge Holder (“QFCH”) – a QFCH has the power to appoint an administrator, provided they hold a valid and enforceable floating charge over the company’s assets.

Statutory Objectives

3. In priority order, the administration must be likely to achieve one of the three purposes of the administration:

a. To rescue the company as a going concern; or

• This might involve restructuring the business, negotiating with creditors or securing new finance.

b. To achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up; or

c. To realise property in order to make a distribution to one or more secured or preferential creditors.

Moratorium

4. A moratorium is in place during the administration. The moratorium prevents legal action being taken against the distressed company without consent. This is a significant advantage of the administration process because it provides the administrator with the breathing space required to formulate and execute a recovery strategy without the pressure of immediate creditor claims.

5. The moratorium typically lasts for the duration of the administration itself (typically 12 months, unless extended). It begins either when the court makes an order for administration or when the appropriate form is filed at court.

Control & Investigation

6. The administrator takes control of the company’s affairs, business and assets from the directors. This allows them to make strategic decisions, sell or dispose of assets, continue business operations, and handle legal proceedings.

7. Administrators also have extensive investigation powers to scrutinise the company’s financial records and affairs. They investigate transactions, assess the directors’ conduct, and report their findings to creditors and the court.

Statement of Proposals

8.  Within 8 weeks of appointment, the administrator must send a statement of proposals to the company’s creditors and shareholders.

9. The Proposals outline the intended approach for achieving the administration objectives, the likely outcome for creditors, and any proposals for a creditors’ meeting.

Creditors’ Meeting

10. Creditors are able to vote on the administrator’s proposals at a creditor’s meeting. If such meeting is requested by a creditor, they must hold at least 10% of the total debt in order to do so.

11. The creditors’ meeting must be convened within 10 weeks of the administrator’s appointment. During this meeting, creditors can vote on the proposals and form a creditors’ committee to oversee the administration process.

Progress Reports

12. The administrator is required to provide periodic progress reports to creditors and the court every 6 months. These reports are also filed on Companies House and detail the progress made towards achieving the administration objectives, financial updates, and any significant developments.

Outcomes

13. The administration may end when either of the following takes place:

a. The objectives have been achieved, or it becomes clear that they cannot be achieved;

b.  The company has been rescued, and control is returned to the directors;

c.  A company voluntary arrangement (“CVA”) is agreed upon;

d.  Sale of business; or

e. The company enters liquidation, typically if the administrator concludes that this is the best outcome for the creditors and if a rescue is not possible.

(These other avenues will be explored further in the Solving Insolvency series)

14. The administrator must file a notice of termination with the court and register it with Companies House to formally end the administration process.

Recent Case

15. A recent case of a company going into administration is Cazoo – the online car retailer which was founded in 2018. The company was once valued at £5 billion but faced mounting debts and operational challenges. Whilst steps were initially taken to mitigate losses, including redundancies, this was not enough.

16. On 21 May 2024, the directors of Cazoo appointed joint administrators from Teneo. The joint administrators will have to undertake the statutory objectives outlined above and explore all options to achieve those objectives. On 15 July 2024, the Statement of Proposals was filed on Companies House. Part of the joint administrators’ proposed actions is to sell the assets of the business and stabilise Cazoo’s operations.

Summary

17. The administration process under Schedule B1 allows continued trading of a company, while providing breathing space to explore rescue options. It is designed to provide a lifeline to struggling companies under the control of a licensed IP acting in the creditors’ interests.

18. By imposing a moratorium on creditor actions, the aim is to maximise potential recovery and minimise losses for creditors. While the process can sometimes be complex in more technical cases, it offers a structured and balanced approach to dealing with corporate insolvency.

If you have any questions or are concerned about your company facing financial distress, please do not hesitate to contact us for legal support and guidance. You can contact us by telephone on 020 7052 3545 or by email info@kaurmaxwell.com.

This article is for general information only. Its content is not a statement of the law on any subject and does not constitute legal advice.

Please contact KaurMaxwell for advice before taking any action in reliance on it.

By: Zara Aziz