When is an insolvent administrative order required?

15 June 2014

An administrative order would be of use when:

  • Cash-flow pressures are intense, but there is still an underlying good business to protect and recover.
  • Creditors are unwilling to agree informal arrangements and some are pursuing the company through legal process.
  • The company is insolvent (either on a balance sheet, or a cash-flow basis) and the directors are concerned about wrongful trading. (Wrongful trading is defined as: A director may be held liable for wrongful trading if they allowed the company to continue in business when they knew or ought to have know that there was no prospect of meeting the company liabilities as they fell due. Put simply, lying about the current state of the company and hiding from reality.)

Once an administrator is appointed, the company is protected from action being taken by creditors. The company cannot be wound up without the court’s permission. The administrator, an insolvency practitioner, will firstly act to stabilise the company and then work with the directors/management to develop a plan for the future. Meanwhile the company continues to trade and the plan is to achieve one of the following:

  • Rescue the company as a going concern, or
  • Achieve a better result for the company’s creditors, than would be likely if the company were to go through another Insolvency process, such as liquidation (without first being in Administration) or
  • Sell company assets in order to make a distribution to the secured/preferential creditors.

Experience shows that there is likely to be some form of business continues after the administration, whether that is within the existing company or a different company. The key cost to an administration is where the business continues to trade during administration, not only incurring its own operating costs but also the costs of the administrator’s team.


This is one reason why the concept of a pre-packaged (pre-pack or phoenix) sale has developed. The pre-pack sale is where an “off-market” sale is lined up prior to the start of the administration process and then an administrator is appointed to conduct the sale. The ethics of pre-pack/phoenix have been questioned, especially where the sale of assets is to a “connected” party, rather than a third party. However it should be noted that such a sale, if conducted following the correct procedure, does not breach any of the legislative rules.

Conclusion

An Administration will last a maximum of 12 months, exceptionally extended to 15 months. At the end of the administration order the company could:

  • be sold
  • enter a Company Voluntary Arrangement. (CVA) and continue trading
  • sell its assets
  • enter into liquidation
  • be struck off (Dissolved) 


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