Administration is a procedure that provides an insolvent company with a period of protection during which time creditors may take no action against the company without permission of the Court. This allows the administrator and the directors to formulate a strategy for the way forward. The Enterprise Act 2002 introduced statutory purposes for an administration. This has now been produced in Schedule B1 of the Insolvency Act 1986.
What is the Administration Purpose?
An administrator must perform his functions with the objective set out in Paragraph 3 of Schedule B1 of the Insolvency Act 1986:
Rescuing the company as a going concern; or
Achieving a better result for a company’s creditors as a whole than would be likely if the company were wound up; or
Realise property in order to make a distribution to the company’s secured or preferential creditors.
These alternative purposes are listed in the order they must be considered by the administrator. For example, if the administrator believes it is not reasonably practicable to achieve the first purpose, the second purpose will apply, and so on. Once a company enters administration, the management of the company is placed under the control of the administrator who is an office of the court.
Unlike liquidation an administration is first and foremost looking to save the company as a going concern whereas liquidation is the death of the company as a trading entity. Administration may be used to enable a company to be rescued by going into a Company Voluntary Arrangement (“CVA”).
They have a duty to act in the best interests of creditors as a whole, and will attempt to realise the best possible returns for all groups if rescue is not possible. If this also fails, they must attempt to achieve a better result for creditors than if the company had been liquidated.
An administrator adopts range of roles and responsibilities during a formal insolvency procedure, as an officer of the court and an impartial agent/manager of the company, and has a duty to act with integrity and good faith.