Brief guide to Administration

Administration is a “rescue” procedure

for companies that are, or are likely to

become, insolvent. It is similar in concept

to Chapter 11 proceedings in the United

States but very different in detail. It

has been extensively reformed since the

Enterprise Act 2002 came into force on

15 September 2003, with the aim of

making it a more efficient process.

Routes into administration

There are now three routes into administration:

by court order; >

by notice filed at court by the holder >of a qualifying floating charge (“QFC”); or

by notice filed at court by the >company or its directors.

Whichever route is followed, an administrator must be satisfied, before accepting appointment, that one of the three following objectives can be satisfied (in descending order of priority):

to rescue the company as a going >concern; or

(if the first objective is not possible), >to achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or

(if the second objective is not >possible), to realise property in order to make a distribution to one or more secured or preferential creditors.

The most typical outcome of an administration is probably the sale of the business and the distribution of the proceeds of sale to the creditors of the company. This would fall within the second objective, as a better result for creditors, rather than the primary objective.

The status of the administrator

The administrator owes his/her duties to the company and its creditors, being required to exercise his functions, “in the interests of the creditors of the company as a whole”.

The administrator is both an agent of the company and an officer of the court. In exercising his functions, the administrator of a company acts as its agent. The primary effect of an administrator acting as a company’s agent is that, in normal circumstances, the administrator will not incur personal liability in respect of any contract or any other obligation that he/she enters into on behalf of the company.

The administration timetable

The administrator is required to produce formal proposals for the achievement of the purpose(s) of the administration within 8 weeks of his appointment (or such longer period as the court allows) and send copies to the Registrar of Companies and all known creditors and shareholders. Within 10 weeks he must hold a creditors’ meeting to approve the proposals and, once approved, must manage the company in accordance with the proposals. Creditors may propose and agree modifications to the administrator’s proposals.

The administration will terminate automatically after a year, unless a six month extension is agreed by the creditors. The administration may extend beyond 18 months, but only with court consent.

The administrator’s powers and duties

The administrator takes over management and control of the company and has the power, on behalf of the company, to do all things necessary or expedient for the management of its affairs, business and property, including the power to remove and appoint directors and to borrow money secured on the assets of the company.

During the administration period, the administrator will typically either attempt to reach a compromise with creditors, so as to restructure the balance sheet into a viable form (if seeking to preserve the company as a going concern) or enter into a disposal process, with a view to selling either the company’s business, or parts of it, for the best price reasonably obtainable.

If the administrator is seeking to reach a compromise with creditors, this may be implemented by means of a statutory “cram down” using either a Scheme of Arrangement or a Company Voluntary Arrangement.

The administrator may make a distribution to a creditor of the company (although court approval is required if this is not to a preferential or secured creditor) and may make any other payment he thinks is likely to assist the achievement of the purpose of the administration.

Pre-pack sales

Where necessary the administrator is able to sell the business and/or assets of the company before the creditors’ meeting, in which case proposals to the creditors will only deal with distribution of the proceeds. A typical example of this will be where a ‘pre-pack’ sale has taken place.

A pre-pack sale is essentially one where the preparatory work (identifying the purchaser and negotiating terms) takes place before the administrator is appointed. On appointment, the administrator then sells the business and/or assets of the company almost immediately. The purpose of carrying out a pre-pack sale is to limit the value destructive effect of an insolvency filing on a business and will generally be used where there would be no surplus available for distribution to unsecured creditors. The purchaser may be the former management or a company owned by the existing lenders who, in effect, bid their debt for the business and/or assets.

Moratorium

The administration process includes a statutory moratorium, preventing creditors from taking certain enforcement actions. This is intended to provide the administrators with a “breathing space”, freeing them from creditor pressure, giving them time to formulate proposals, lay them before the creditors and implement those which are approved. The moratorium lasts for the duration of the administration.

The moratorium suspends the power of creditors to take certain actions against the company in administration or its property. However, it is important to note that the moratorium does not prevent the enforcement of contractual rights (such as the right to terminate a contract as the counterparty has gone into administration).

The moratorium does prevent the following, unless the administrators or the court agree that such actions can be taken:-

the enforcement of security over the >company’s property (except in certain specified circumstances under the Financial Collateral Regulations);

the repossession of goods in the >company’s possession under a hire-purchase agreement (which term includes retention of title provisions);

a landlord’s right of forfeiture by >peaceable re-entry;

the appointment of an administrative >receiver; and

any legal process (including legal >proceedings, execution, distress and diligence) against the company or its property.

Payments by the Administrator

If there is a sale of all or part of the company’s business, administrators can elect to distribute the proceeds which they have realised to the company’s creditors, although they usually decide to transfer the proceeds to a liquidator, who would then deal with the distribution process.

In either case, the administrator or liquidator is under a duty to make such distributions in accordance with a statutory order of priority which, broadly speaking, runs in the following descending order:

proceeds of fixed charged assets >(less direct realisation costs) to fixed chargeholders;

expenses of the administration >(which include contracts entered into by the administrators as agent for the company in administration);

preferential debts (primarily limited >amounts due to employees);

the ‘prescribed part’ set aside for >unsecured creditors from realisations of floating charge assets (up to a maximum of £600,000);

proceeds of floating charge assets >(less preferential debts and the ‘prescribed part’ as above) to floating chargeholders;

unsecured creditors; and >

any surplus to shareholders per >shareholder rights.

As the list above shows, unsecured claims rank beneath claims by secured creditors. All unsecured liabilities arising out of obligations incurred before the date of administration rank pari passu with each other.

Administration expenses Expenses of the administration have priority over other claims save for those of fixed chargeholders. Although the administrator does not assume personal responsibility for contracts entered into on behalf of the company, any liability incurred under a contract entered into whilst the company is in administration will be payable as an expense of the administration. Expenses include (but are not limited to):

expenses properly incurred by the >administrator in performing his functions;

any necessary disbursement made by >the administrator; and

the remuneration of any person >who has been employed by the administrator to perform services for the company.

Notably, expenses properly incurred by the administrator in performing his functions in the administration of the company will rank ahead of all other expenses (such as contractual obligations), including the administrator’s remuneration. The administrator will therefore not get paid until the relevant expenses have been fully repaid. Contractual counterparties can take a certain amount of comfort from this - by way of example, the obligation to pay for services supplied after the date of administration will rank (on a distribution) above the right of administrators to remuneration. In addition, certain liabilities under ‘adopted’ employment contracts will rank as expenses ahead of the administrators’ remuneration.

Administrators will therefore want to keep expenses of the administration to a minimum and to incur as few liabilities as possible. Consequently when administrators are entering into agreements in relation to pre-administration contracts, wording is likely to be included that the pre-existing contractual liabilities remain as unsecured claims, although administrators are likely to concede that post-administration obligations under the contract rank as expenses. They will wish to avoid a situation where a counterparty argues that by entering into an agreement in relation to an existing contract this elevates the unsecured claim to an expense. Administrators will also need to decide (within the period of 14 days after their appointment) which employees to keep on, given the consequences of adopting an employment contract highlighted above.

Refusal by administrators to give indemnities, warranties and representations

Administrators will generally not give any indemnities or guarantees, either personally or on behalf of their firm or the company. Similarly, representations and warranties by a company in administration should be avoided given that, with a company only recently having been put into administration, the administrators cannot be expected to have full knowledge of the relevant facts and circumstances. Further, under no circumstances would an administrator be willing to accept personal liability in the context of business or transactions carried out on behalf of the company in administration given that, as discussed above, the administrators act as agents of the company and will require assurances wherever possible that personal liability will be excluded.

“Linklaters gives an absolutely rock-solid performance in the restructuring and insolvency area.”

Restructuring & Insolvency; Chambers UK, 2009

International effect of the administration

Within the EU, the administration and its effects (including the moratorium) will usually have automatic recognition under the EC Regulation on Insolvency Proceedings.

Outside the EU, where a jurisdiction has adopted the UNCITRAL Model Law on Cross Border Insolvency, the administration will also usually be recognised, although the effect of such recognition will depend on the implementing legislation. For example, recognition in the US, under Chapter 15 of the US Bankruptcy Law, as a ‘foreign main proceeding’ would ensure that the administration would have the benefit of the US ‘automatic stay’ (similar to the English statutory moratorium).

In other cases, there may be a treaty governing insolvency matters between the UK and the other jurisdiction, failing which it will be a matter of local law as to whether the administration and any of its effects (such as the moratorium) are recognised.

Banking & Restructuring team of the Year 2008

British Legal Awards

Restructuring of the Year 2008 for Eurotunnel

IFR’s Review of the year Awards

Restructuring of the Year 2009 for Cheyne Finance

Acquisitions Monthly Awards

Restructuring of the Year 2008 for Eurotunnel

Acquisitions Monthly Awards

Further Information Linklaters has a global restructuring and insolvency practice, of which the United Kingdom is a significant part. This guide covers matters of English restructuring and insolvency law only.

Guides for other jurisdictions may be available on request from your usual Linklaters contact.

Key London R&I contacts

Tony Bugg Partner, Global Head of Restructuring and InsolvencyTelephone +44 20 7456 4470tony.bugg@linklaters.com

Robert Elliott Partner, Global Head of Banking Tel: +44 20 7456 4478 robert.elliott@linklaters.com

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© Linklaters, 2008

Linklaters converted to Linklaters LLP on 1 May 2007. References in this document to Linklaters for the period following 1 May 2007 accordingly refer to Linklaters LLP and, where relevant, its affiliated firms and entities around the world.

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