What are the duties of an administrator? Fiona Gaskell, Partner and Dispute Resolution Solicitor at Clough & Willis, explains the role of the administrator during company administrations.

What is administration?

Administration is an insolvency procedure which can be entered into by Limited Companies and Limited Liability Partnerships. Its purpose is to protect the company or the partnership from legal action by creditors during the administration, so a moratorium is created to achieve this. No proceedings can be issued, no winding up petitions can be presented, and no other action can be taken. The only exception is if that action is approved by the Court.

The company can place itself into administration, or it can be placed into administration by creditors of the company. The more usual situation is for the company to enter into discussions with an insolvency practitioner who will advise whether an administration is likely to be beneficial. This depends upon whether there is a prospect of achieving a better outcome for the creditors, the company as a whole and the company’s employees.

The advising insolvency practitioner will usually be appointed as administrator. Only a licensed insolvency practitioner can become an administrator and in carrying out that role the administrator will take control of the company and will be paid by the company.

What happens during administration?

The administrator will notify creditors and Companies House and place a notice in The Gazette to make everyone who is potentially interested in the company is aware that the company has appointed an administrator and entered into administration and is therefore protected from any adverse action which might be considered by a creditor.

Once in office, the administrator will have 8 weeks to prepare a statement setting out their plans for the company which will usually be considered at a creditor’s meeting. The statement will be sent to creditors, employees and Companies House and the hope is that the plan set out by the administrator will be agreed by the creditors.

The overall purpose of administration is to achieve a better result for the company and its creditors than would be achieved if the company was simply wound-up. To achieve this, the administrator will consider several ways in which to proceed:

• They might recommend that the company enters into a company voluntary arrangement (CVA), which also protects the company from its creditors. Under this the company will make regular payments to the ‘supervisor’ of the CVA over a period of a few years, in order to produce some money which can be used as a payment to the creditors and in the meantime the company can continue to trade.
• Another option is to sell the company as a going concern, the business would then carry on. If the administrator believes the business cannot carry on, they can sell assets of the company to achieve the best possible price and then wind up the company.
• If the company has no saleable assets, then the administrator may decide that nothing can be achieved by continuing with the administration and the company may quickly be put into liquidation.

What are the duties of an administrator?

During the time that the administrator is in charge they will have control over the company. They can cancel or renegotiate contracts, they can make employees redundant, they have a very wide range of powers but those must be used for the benefit of the creditors as a whole.

They should also review their position every 6 months and report to the creditors. This keeps the creditors involved in what is happening and gives them the opportunity to ask for further information if they have any concerns.

What is a pre-pack administration?

A pre-pack administration is where the sale of all or part of a company’s business and assets is negotiated before an insolvency practitioner is appointed. 

Many people have heard about pre-pack administrations, or ‘pre-packs’, as they have had bad publicity historically, and some creditors view them as unethical. This is because, in many instances, the pre-pack will involve a sale of the company or company assets back to the original directors. If this results in a shortfall, meaning that creditors cannot be paid in full or at least with a high percentage of their debt, it’s understandable that they will be unhappy and may suspect collusion between the administrator and the directors.

However, this misunderstands the purpose of the administration, which is to achieve a result which is better than can be achieved under liquidation and ideally to rescue the company as a going concern. It is likely that only someone who has had involvement in the company will be interested in taking on the business or the assets and such a person is likely to be a director. However, to many creditors the directors are not being held to account.

This is not true. Once the company has been sold as a pre-pack, the administrator will allow the company to proceed to liquidation and the ‘liquidator’ (who may be someone different to the administrator) will prepare a report concerning the directors’ conduct. If it is suspected that they have behaved in a way that is contrary to their duties or if they have breached any statutory provisions, then their conduct can be investigated, and they can be prosecuted.

In addition, where a company is sold as a pre-pack there is a high probability that some employees will continue to be employed and there will be no change in their rights as employees. This is a considerable advantage to the employees of the company and would not be achievable if the company has simply been wound-up in the first place.

Summary

The administrator knows that their conduct and any sale to a director or former directors is likely to be scrutinised and it is therefore important that they act ethically and in accordance with their Professional Practice Rules. Over the last few years there has been a much greater openness about the sale of businesses by the administrator and guidance given by their professional bodies about how to balance the need to sell quickly and ensure that a sale to a former director realises the best possible price.

The administrator must carefully balance all competing claims to avoid undue criticism. Their duties must be exercised for the benefit of the creditors as a whole, if possible, to rescue the company as a going concern, to obtain a better result than would be achieved on liquidation and to realise company assets to enable them to make a distribution to creditors.

About the author

Fiona Gaskell is a Partner and Dispute Resolution Solicitor at Clough & Willis, who specialises in property disputes and insolvency, acting for private individuals, insolvent businesses and trustees, liquidators and administrators.

See also

Place an insolvency notice

What you need to know about a company voluntary arrangement (CVA)

What are the responsibilities and duties of a company director?

How will The Administration Regulations 2021 affect the sales of assets in administrations?

What is an insolvency practitioner?

What happens if a football club goes into administration?

Find out more

Put your company into administration (GOV.UK)

Image: Getty Images

Publication date: 16 May 2022

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.