Why was the concept of administration introduced in 1986?
There existed for many years a feeling that too many companies were lost that might have been rescued. A company that got into difficulties all too often went into liquidation. This happened either straight away or following receivership. A receiver's primary function was to safeguard the interests of the secured creditors that appointed him, often a bank. The interests of the company and other creditors were secondary.
This was one of the problems addressed by the Insolvency Act 1986. The Act introduced the concept of administration. One of its features was an interval during which a company had protection from its creditors. This interval was to be used either to turn round the business and save all of it or part of it, or to lead to a winding up on more advantageous terms. There are of course dangers in this and safeguards are necessary, one being that the administrator must be a Licensed Insolvency Practitioner.
Yes - but just what is administration?
Administration gives a breathing space to a company in financial difficulties. During this period it is under the control of an administrator (who must be a Licensed Insolvency Practitioner) and not the directors. At the end of the period of administration the company is returned to the control of the directors, or to a liquidator if the company is wound up.
An administration order may be granted by a court or there are out of court routes into administration. Administration is only for one of the purposes described in the answer to question 468. Whilst it is in force, creditors may not bring or continue a legal action to recover money due to them, and there are other restrictions too. On no account should an administrator be confused with an administrative receiver. Despite the similarity in names they are completely different.
What is a Licensed Insolvency Practitioner?
The Insolvency Act 1986 stipulates that all liquidators, administrators and administrative receivers must be Licensed Insolvency Practitioners. A Licensed Insolvency Practitioner is licensed and holds one of a number of specified professional qualifications. The practitioner is bound to observe professional standards. Complaints are sometimes made about the costs, and occasionally unsatisfactory work is reported. However, professional standards are now generally maintained. Of course, given that people sometimes lose money in administrations and receiverships, and always lose money in insolvent liquidations, some hard feelings are almost inevitable.
What are the permitted purposes of administration?
The administrator must pursue one of three aims:
Rescue the company as a going concern.
Achieve a better result for the company's creditors as a whole than would be likely if the company were to be wound up (without first being in administration).
Realize property in order to make a distribution to one or more secured or preferential creditors.
The administrator is required to pursue the first objective so long as he thinks it reasonably practical to do so. Rescuing the company as a going concern means the company and as much of its business as possible. If he thinks that it is not possible, the second objective ranks ahead of the third objective.
Who can apply to have a company put into administration?
Most applications are made by the directors using the out of court route. Out of court routes into administration may be instigated by the company itself, its directors or the holder of a qualifying floating charge.
An application to the court may be made by any of the following or any combination of them acting together:
The company itself.
The directors - this means on behalf of the majority, not a minority.
One or more of the creditors.
The Justices' Chief Executive who has the responsibility of recovering fines imposed on the company.