Administration is a process whereby the Court, usually on the application of the company itself, but possibly by a creditor, makes an Order appointing a Licensed Insolvency Practitioner to take control of the company while at the same time stopping any creditor from taking any legal action against it. It can also go into Administration simply by filing the appropriate papers in Court, subject to the agreement of any debenture-holder. An Administration would be appropriate if the company is, or is likely to become, insolvent but has a business which is, or could be, viable but needs time to reorganise. Alternatively it may be that it has assets which if sold carefully over a period of time might fetch more money than if realised on forced sale basis by a Liquidator. The Administrator must present his plans to the creditors for dealing with the company within 8 weeks of being appointed. The Administration is only intended to be a short-term measure and usually only lasts for a few months before it either converts into a Company Voluntary Arrangement or goes into Liquidation. In any event it cannot last for more than one year without the Court’s agreement.
Sometimes Administration can be a very useful tool to use to save a business if it is very sensitive to bad publicity. If the very fact of going into a formal insolvency procedure would be enough to damage the business irreparably then it may be possible to use an Administration to achieve a sale, very often as a management-buy-out, instantaneously on the appointment of the administration. Such a procedure is called a “pre-pack”. For it to be done properly the insolvency practitioner must be absolutely satisfied that the price being paid for the business is a fair one and in the interests of the creditors and he will have to take careful steps to do so before completing the deal, because there will not have been a period of public marketing beforehand. If the sale is to be to a connected party he will encourage them to put the proposal to the Pre-Pack Pool which is a panel of experts who will provide a report which can be shown to creditors as evidence that it is in their best interests.
When it was first introduced by the Insolvency Act in 1986 Administration was seen as useful only for a company which did not have a debenture and so could not have an Administrative Receiver, but now it is being used more frequently even if there is a debenture in place. The reasons are partly because banks are less willing to be seen to be directly putting their customers into a formal insolvency process and also because it is no longer necessary to have a formal Court hearing, but even if it is, the Courts are now more willing to make Administration Orders without the need for detailed reports which were prohibitively expensive. There can therefore be some significant savings in costs, especially for the smaller company. For these reasons Administration is becoming much more common than it used to be and has almost entirely replaced Administrative Receivership.