Directors running limited companies that have financial difficulties are usually more than sufficiently stressed out, without the worry of having to learn all about the Administration process. Although fairly complex, we have set out below a summary of the key issues that we are regularly asked together with our reasonably simplified explanations.
What is the company Administration process?
The idea behind the Administration process, is to allow a company with financial difficulties sufficient time to try and trade out of those difficulties. It is a formal process which can only be carried out by a licenced insolvency practitioner and must in the first instance been approved by court.
The main reason that a company goes into Administration, is to seek formal protection from its creditors, whilst the Administrator, usually with the help of the directors look for a solution to the company’s financial problems. Once an Administration order has been granted and the Administrators appointed, then no creditor can take any further action against the company or commence any legal action, whilst the Administration order remains in force.
How do I place my company into Administration?
The majority of Administrations are instigated by a secured lender to the company who has what is known as a qualifying floating charge over the company, allowing it to appoint Administrators. In these situations, the lender will have been in dialogue with the company for some weeks prior to the appointment taking place – it is extremely unusual for a secured lender to make an appointment at short notice. The secured lender will usually appoint Administrators from their panel of licenced insolvency practitioners.
The directors of the company can also consider appointing Administrators, although if there is a secured lender with a qualifying floating charge (“QFC”), the directors would need the consent of the secured lender first. If there is no qualifying floating charge, then the directors can appoint a person of their own choosing, so long as that person is a licenced insolvency practitioner.
The actual process of placing a company into Administration is reasonably simple. The directors hold a board meeting recognising the company’s financial difficulties and pass a resolution to file a notice of intention to appoint Administrators. If there is a secured lender with a QFC, then the company must give that lender up to a maximum of 5 days’ notice of intention to appoint Administrators. The secured lender can either consent to the director’s choice, or can appoint Administrators of their own choosing.
What happens once the company goes into Administration?
Once the Administration order has been granted and the Administrators appointed, they immediately become legally responsible for everything to do with that company and the directors powers effectively cease at that point. The primary purpose of most Administrations is to achieve a better result for the creditors than would be the case if the company simply ceased trading and went into liquidation.
It is likely that the Administrators will have some knowledge of the company prior to being appointed, especially if they have been introduced to the company by any secured lender – they will usually have visited the company at least once prior to appointment to provide an overview and recommendations to the secured lender. They will therefore understand exactly what the company’s position is in relation to contracts, orders, suppliers, employees etc. Where there is the possibility of trying to sell the business as a going concern, the Administrators may well continue trading whilst they look to market the business. However, if the Administrators conclude that there is little chance of finding a buyer on a going concern basis, they may still finish off contracts or orders, if they believe that it will enhance realisations for the creditors generally.
Can directors buy back the company from the Administrators?
The simple answer is yes. This is usually done through what is known as a pre pack – i.e. a pre-packaged sale. Immediately prior to appointment, the directors will have discussed with the potential Administrators (they will not have been formally appointed as Administrators at this stage) the possibility of buying the business back. The potential Administrators will have arranged for the assets to be independently professionally valued in order that the directors are aware of the approximate level of funding required to buy the assets back. Bear in mind, that if you are considering a pre pack Administration, not only will you need the finance to acquire the assets from the Administrator, but you will also need finance to fund initial trading until the new company’s cash flow kicks in. We have extremely strong ties with a number of funders who specialise in this particular field.
If we complete a pre pack, what happens to the original company’s liabilities?
The original company’s liabilities rest against the company in Administration. If you complete a pre pack purchase, you will simply be acquiring the assets of the company in Administration – this will usually be done by through a new off the shelf company. All of the old company’s liabilities stay with the company in Administration. The only exception, will be the claims of the employees. Under the Transfer of Undertaking Regulations, employees who were employed at the time of the Administration will automatically transfer across to the new company where a pre pack sale is effected. There are certain exceptions although we do not propose to bore you with that detail here – we would be delighted to explain any issues that you have either on the phone or by popping out to see you.
Can I buy the company name as part of the pre-pack deal?
Again the simple answer is yes BUT there are a number of issues that you will need to address to avoid inheriting unwanted liabilities. In certain situations, the company name will be as important as the other assets. However, whist this can be included as part of a pre pack transaction, there are certain restrictions contained within section 216 of the Insolvency Act which you need to deal with. This section deals with what is known as a prohibitive name – that is a name by which the company has been known during the last 5 years prior to Administration or a name that is so similar as to suggest the actual name. If, as a director of the old company in Administration, you want to acquire and use that old name, then you must either seek the approval of the court or write and get the approval of the old company’s creditors.
If you do neither of these things, then, if reported, you could be prosecuted and become liable for the old company’s debts – NOT a very good idea! It is absolutely essential, that if you are considering buying back the old company name, that you take experienced advice from a solicitor with experience in commercial law and ideally experience in insolvency.
Are there any special rules applicable solely to pre packs?
Yes – lots of them. Over the years, certain pre pack Administrations have attracted some pretty negative press which has caused the regulators to sit up and take an active interest in the way in which pre packs are effected. A whole new Statement of Insolvency Practice has been devoted to this area – SIP 16. The pressure though is more on the Administrator to show that the pre pack deal was the best one for the creditors. To do this he must show that he has considered a host of key points including:
- Marketing the business for sale
- Actively seeking out alternate buyers for the business
- Discussing the Administration with any major creditors
- Being totally satisfied that the pre pack is the only deal that gives the highest return to creditors.
A panel of experienced professionals has been established to review any prospective pre pack transaction – it is known as the pre pack pool. The idea is that to help eliminate criticism from creditors in respect of any pre pack sale back to directors, the directors refer their proposed pre pack transaction to the pool. A panel member will then provide feedback on any contentious areas. This is merely a voluntary option – whist the Administrator may suggest that the directors refer the proposed pre pack to the panel, there is no legal obligation to do so.
How much does it cost to do a pre pack Administration?
This is a really difficult question to answer given that no two companies are alike. Most Administrators will look to be paid on a time cost basis. Their fees will be paid out of the assets under their control.
However, from October 2015, all Administrators must produce a detailed summary of the costs that they expect to incur on each case. This costing must be sent to all creditors shortly after their appointment and their fees will be restricted to the maximum shown on that costing. In the event that the Administrator’s time costs exceed their original estimate, then they can only pay the additional costs if approved by the creditors.
At Corporate Financial Solutions we pride ourselves on being completely 100% independent and as business owners ourselves we understand the pressures or running a business. Whilst we are unable to give a quote without knowing exactly what is involved, we believe that you find our fees to be highly competitive. We provide an extremely fast, efficient and professional solution to whatever financial problems your company may be facing.
We do not charge any upfront fees, nor do we charge for the initial meeting. In any event, in the vast majority of cases, our fees will be paid out of the funds realised from the sale of the assets.
Offices in London and the Midlands
We help businesses throughout the UK. We have offices in London and the Midlands and are happy to travel to your location to meet with you.