Actions of directors receive considerable attention when a company is facing financial difficulty. The law imposes a duty on directors of companies in financial difficulty to take all reasonable steps to minimise potential losses to creditors.
These steps may include placing the company under an appropriate corporate rescue mechanism or winding it up. This article examines the use of administration, and particularly an out of court appointment, as a corporate rescue mechanism.
Administration is an insolvency procedure where a company is placed under the control of an insolvency practitioner, referred to as an administrator. The general rule is that a company cannot go into administration unless it is insolvent, or likely to become insolvent. This is when a company is not able to meet its liabilities as they fall due, or the value of its liabilities (including its contingent and prospective liabilities) exceeds the company’s assets. The exception to this general rule applies where administration is commenced by a creditor who holds a qualifying floating charge over the company’s assets.
Administration allows a company in financial difficulty to restructure its debt, with protection from its creditors by way of a statutory moratorium. A statutory moratorium is a freeze on all enforcement action that may be taken against a company’s assets by the company’s creditors. This includes suspending or stopping eviction by landlords for outstanding rent. The statutory moratorium comes into force immediately when the administrator is appointed, and it lasts for 12 months. It may be extended by a further 12 months by a court or by consent of the creditors, depending on whether the objectives of the administration will have been achieved.
Two steps towards administration
There are two ways in which a company can go into administration. The first way is through a court appointment after a formal hearing (court process). The court process is dependent on the court’s diary, and thus may be time consuming. The second way into administration is through an out of court appointment. This is more efficient and can be initiated by the directors or shareholders of the company or by a qualifying floating charge holder (often a bank or other commercial lender). It is initiated by lodging a notice of appointment together with board and/or shareholder resolutions at the official receiver’s office and with the court. The filing done in court is not to seek its approval but merely to notify it of the appointment of an administrator because it retains an oversight role.
Advantages of an out of court administration include:
- It is faster than the court appointment route, thereby making the administration process less costly;
- It has the prime advantage of a statutory moratorium without a lengthy court proceeding to obtain it;
- Control of the company is given to an administrator who is an insolvency practitioner with knowledge and experience dealing with companies in financial difficulties. This will normally increase the survival chances of a company in financial difficulty;
- If the debt restructuring exercise during administration is successful, the company will be handed back to the old or new directors to actively manage it as a going concern.
Corporate insolvency is a highly specialised area of practice. The key issue for directors is therefore realising when to call in the experts. Directors should seek expert advice during the early warning signs of insolvency when the company may still be rescued.