Administration in United Kingdom law

When applying to the court, the petitioners for administration may be either the company's directors, or any creditor.[4] But an important change since the Enterprise Act 2002 is that it is also possible for a director and, crucially, the holder of a floating charge over the company's whole property to apply for appointment of an administrator out of court.[5] If a director applies for an out of court appointment, they must give 5 days' notice to any such qualifying floating chargee, who may in turn intervene in court to have their own 'specified person' appointed as the administrator.[6] The court may refuse if the 'particular circumstances of the case' (undefined) suggest otherwise.[7] The effect is that the holder of a qualifying floating charge is in a robust position to have their preferred insolvency practitioner installed.

Because an administrator can, since the Enterprise Act 2002, be appointed out of court, a new practice of pre-packaged administration became increasingly popular, whereby typically the company directors negotiate with a prospective administrator for the sale of the business to take place immediately after entering administration, and often to the company's former management.[8] The perceived benefits of this practice, originating in the 1980s in the United States,[9] is that a quick sale without hiring lawyers and expending time or business assets through formalities, can be effected to keep the business running and employees in their jobs.

The potential downside is that because a deal is already agreed among the controlling interested parties (directors, insolvency practitioners and usually the major secured creditor) before broader consultation, unsecured creditors are left behind as the momentum behind the deal carries events forward. The concern in the business community is thus that a plan gets foisted on creditors without much time for consideration that works most in favour of the people who ran the company or the large secured lender. In Re Kayley Vending Ltd, which concerned an in-court appointed administrator,[10] HH Judge Cooke held that a court will ensure that applicants for a prepack administration provide enough information for a court to conclude that the scheme is not being used to disadvantage unsecured creditors. Moreover, while the costs of arranging the prepack before entering administration will count for the purpose of administrator's expenses, it is less likely to do so if the business is sold to the former management. Here the sale of a cigarette vending machine business was to the company's competitors, and so the deal was sufficiently "arm's length" to raise no concern. In their conduct of meetings, the Court of Appeal made clear in Revenue and Customs Commissioners v Maxwell that administrators appointed out of court will be scrutinised in the way they treat unsecured creditors. Here the administrator did not treat the Revenue as having sufficient votes against the company's management buyout proposal, but the court substituted its judgment and stated the number of votes allowed should take account of events all the way in the run up to the meeting, including in this case the Revenue's amended claim for unlawful tax deductions to the managers' trust funds and loans to directors.[11]

While the moratorium is in effect the administrator's core purpose and duty under paragraph 3 is to rescue the company, or if impracticable, typically transfer the business as a going concern, or as a last resort break up the business and distribute proceeds to creditors.[19] This and other duties, found in Schedule B1, paragraph 3, are theoretically meant to be exercised for the benefit of the creditors as a whole. There is some tension, however, between the duties on paper, and the administrator being appointed in fact by secured creditors, or through a pre-packaged insolvency.

Once in place, the first task of an administrator is to design a restructuring proposal. This should be given to the registrar and unsecured creditors within 8 weeks, followed by a creditor vote to approve the plans by simple majority. If creditors do not approve the court may make an order as it sees fit.[20] Until then, the powers of administrator extend under Schedule B1, paragraph 59 to 'anything necessary or expedient for the management of the affairs, business and property of the company'.[21]

In Re Transbus International Ltd Lawrence Collins J made the point that the rules on administration were intended to be "a more flexible, cheaper and comparatively informal alternative to liquidation" and so with regard to doing what is expedient "the fewer applications which need to be made to the court the better."[22] This wide discretion of the administrator to manage the company is reflected also in paragraph 3(3)-(4), whereby the administrator may choose between which result (whether saving the company, selling the business, or winding down) "he thinks" subjectively is most appropriate. This places an administrator in an analogous position to a company director.[23]

An administrator's further duties allow a broad scope for the administrator to exercise good business judgment. An administrator is subject to a duty to perform her functions as 'quickly and efficiently as is reasonably practicable',[24] and must also not act so as to 'unfairly harm' a creditor's interests. In Re Charnley Davies Ltd (No 2) the administrator sold the insolvent company's business at an allegedly undervalued price, which creditors alleged breached his duty to not unfairly harm them.[25] Millett J held the standard of care was not breached, and was the same standard of care as in professional negligence cases of an "ordinary, skilled practitioner". He emphasised that courts should not judge decisions which may turn out sub-optimal with the benefit of hindsight. Here the price was the best possible in the circumstances.