House of Commons - Explanatory Note
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Clause 239 & Schedule 16: Replacement of Part II of Insolvency Act 1986

606.     In order to provide for the streamlining of administration, clause 239 replaces Part II of the Insolvency Act 1986 with a new Schedule B1 - as set out in Schedule 16 of this Bill. This will be inserted after Schedule A1 to the Insolvency Act 1986. The paragraphs referred to below are paragraphs in Schedule B1.

General effect of Clause 239 and Schedule 16: Nature of administration

607.     In general terms, the effect of clause 239 and Schedule 16 is as follows. Whether or not appointed by the court, an administrator is an officer of the court (as well as an agent of the company) and can only be appointed if qualified to act as an insolvency practitioner. An administrator may not be appointed if the company is already in administration. Generally, a company cannot go into administration if:

  • a resolution for voluntary winding-up has been passed (see paragraph 7(1)(a)); or

  • a winding-up order has been made (subject to an application by the liquidator or a floating charge holder) (see paragraph 7(1)(b)).

The purpose of administration

608.     In order to clarify the purpose of administration and to place greater emphasis on company rescue, paragraph 3 replaces the existing four statutory purposes under section 8(3) Insolvency Act 1986. Under a single overarching purpose, which will apply to all cases of administration, the administrator will be required to carry out his or her functions with the objective of rescuing the company where it is reasonably practicable (i.e. the company and as much of its business as possible). A hypothetical example might be:

    Company A is operating at a profit and has excellent products, a loyal customer base and a healthy order book. However, major investment in a new IT system, which is late and over-budget, has knocked the company off its business plan, its cash flow has suffered and it is unable to pay its debts. The company has been placed in administration and the administrator has had an offer for its business that would provide sufficient funds to pay the secured creditors and give 35p in the pound for unsecured creditors. However, the administrator has determined that the problems are short-term and they can be resolved and will not have any ongoing effect. The company's bankers have given their support to the administrator's plans to continue trading, the company's business is profitable and the administrator is confident that the company can be rescued by trading its way out of its current financial difficulties, and provide 65p in the pound return for unsecured creditors within 12 months. The administrator puts his or her proposal to the creditors.

609.     An example of a case where a rescue would not be reasonably practicable is one where it is clear that the only viable options depend on the continuing support of the company's bankers. The administrator knows that this support will not be forthcoming and that there is no alternative means of financing the company. Whether a company rescue is a reasonably practicable option is a matter of commercial judgment and, on the basis of the current case law in relation to similar decisions under the current administration procedure, it is envisaged that the courts will not seek to criticise the exercise of such judgment, except in cases where bad faith can be established or the decision taken was one that no reasonable administrator would have taken. (As to the courts' attitude in relation to commercial matters, see for example, re: T&D Industries plc (in administration) [2000] 1 BCLC 471.)

610.     Company rescue in the context of the clause means the company continuing as a going concern, with all or a significant part of its business, and is most likely to involve the creditors agreeing to the company entering a CVA or a scheme of arrangement under section 425 Companies Act 1985. For the purpose of these clauses, a proposal that would result in a 'shell' company remaining would not be considered a rescue.

611.     If the administrator considers that a company rescue is not reasonably practicable, either in realising economic value or in timescale, he or she will seek a better result for the creditors than on a winding-up. This might encompass situations where the company's individual businesses are broken up and sold to one or more buyers as going concerns in order to achieve this better result for creditors. Assets of the company may also be sold without a going concern basis. A hypothetical example might be:

    Company B has good products, and a sound customer base. The company is making losses, its plant and machinery are outdated, and its overheads and debts have been rising for some time. The company has been placed in administration and the administrator has determined that there are no funds available to maintain its trading operation or invest in new machinery and it is therefore not reasonably practicable to rescue the company. The administrator has reviewed the company and determined that a sale of its businesses on a going concern basis would provide a better return than a break-up sale of its assets. The administrator markets the businesses and the best offer he or she receives would provide sufficient funds to pay the secured creditors and give 40p in the pound for unsecured creditors. The administrator reports to the creditors at a meeting and explains why it was not reasonably practicable to rescue the company.

612.     The purpose specified in paragraph 3(1)(c) deals mainly with those cases where the company is not viable and has no business that can be sold as a going concern. All that can be done is to sell the company's remaining assets in order to make a distribution to one or more secured or preferential creditors. A hypothetical example might be:

    Company C is a service company whose business and reputation were built around its excellent standards of customer service. But a number of key personnel have recently left, the quality of the company's service and its reputation have suffered badly, customers have become dissatisfied and the company is no longer able to attract and retain business. It has been making losses for a number of months and is unable to pay its debts. The company is then placed in administration. The administrator reviews the company and concludes that its business is not viable and a sale is not possible. The administrator markets the company's assets and realises funds that are sufficient to make a part-payment to the secured creditors, and there are no funds available to pay unsecured creditors, except for those resulting from the operation of the ring-fence (see clause 243). The administrator reports to the creditors and explains why it was not possible to achieve either a company rescue or a better return for unsecured creditors.

613.     Under paragraph 3(2) an administrator must have regard to the interests of all creditors. In situations where there are insufficient funds to pay the unsecured creditors, the administrator must not unnecessarily harm their interests.

Appointment of administrator

614.     Currently, administrators can only be appointed by court order (see section 8 Insolvency Act 1986, as originally enacted), and this route into administration has been retained for those currently entitled to use it. However, in order to speed up the process, paragraphs 12-32 set out provisions for the holders of floating charges and companies or their directors to appoint administrators without a court hearing. A diagram showing the out-of-court routes into administration is at Annex D.

Appointment by court

615.     Paragraphs 8-11 set out the court route into administration. A floating charge holder, a company or its directors, or one or more creditors of a company can apply to court for an administration order (see paragraph 10). The court may only make an order if it is satisfied that the company is, or is likely to become, unable to pay its debts and that the order is reasonably likely to achieve an objective/the purpose of administration (see paragraph 9).

616.     Paragraph 10(2) provides that, once an administration application has been made, the applicant must notify, amongst others, anyone who has appointed, or is entitled to appoint, either an administrative receiver or an administrator. The application for administration cannot be withdrawn without the permission of the court (see paragraph 10(3)).

617.     On hearing an application for administration, the court may either make the order, dismiss the application or make any other order deemed appropriate, including treating the application as a winding-up petition or making an interim order (paragraph 11).

Appointment by the holder of a floating charge

618.     Paragraphs 12-19 set out the out-of-court route into administration for the holders of floating charges. Floating charge holders will be able to appoint an administrator of their choosing, provided that:

  • the floating charge on which the appointment relies is enforceable (see paragraph 14). In this context, enforceable means that the floating charge holder is entitled to call in their security;

  • he or she has given notice to the holder of any floating charge which has priority over his or her own floating charge (see paragraph 13);

  • the company is not in liquidation (see paragraph 7(1)(a) and (b)) nor has a provisional liquidator been appointed (see paragraph 15(a)); and

  • neither an administrative receiver (see paragraph 15(b)) nor administrator is already in office (see paragraph 6).

619.     Before the administrator takes office, the floating charge holder must file a notice of appointment with the court (see paragraph 16(1)) identifying the administrator and including a statement from the administrator consenting to the appointment (paragraph 16(3)). Attached to this will be a statutory declaration (paragraph 16(2)) by the floating charge holder stating that they have a qualifying floating charge - which may be one or more floating charges (together with other security) - over the whole or substantially the whole of the company's property and that this is or was enforceable on the date of the appointment (as to when the holder of a floating charge can appoint an administrator, see paragraph 12).

Appointment by company or directors

620.     Paragraphs 20-32 set out the out-of-court entry route into administration for companies or the directors of companies. A company or its directors will only be able to appoint an administrator if:

  • the company has not been in administration (instigated by the company or directors) (see paragraph 21(2)) nor subject to a moratorium in respect of a failed CVA under Schedule A1 to the Insolvency Act 1986 in the previous 12 months (see paragraph 22(3));

  • the company is or is likely to become unable to pay its debts (see paragraph 25 (2)(a));

  • there is no outstanding winding-up petition in respect of the company (see paragraph 23(a));

  • the company is not in liquidation (see paragraph 7(1)(a) and (b)); and

  • there is no administrator or administrative receiver in office (see paragraphs 6 and 23(c)).

621.     The 'notice of intention to appoint' will also identify the proposed administrator (paragraph 24(3)). Once the 'notice of intention to appoint' is sent to the floating charge holder and filed at court, an interim moratorium commences (paragraph 42(2)).

622.     During the notice period, a floating charge holder entitled to appoint an administrator may either agree to the proposed appointment or appoint their choice of administrator (paragraph 12). The company or directors must give floating charge holders at least five business days' notice in writing of their intention to appoint an administrator in this way (paragraph 24). The 'notice of intention to appoint' must also be filed with the court and accompanied by a statutory declaration, stating that the application meets the criteria set out in paragraph 25 (2).

623.     If the floating charge holder consents to the company's or directors' nominee or does not respond to the notice within five business days, the company/directors must make the appointment no more than ten business days after filing their 'notice of intention to appoint'. If the 'notice of appointment' is not filed within this period, the interim moratorium will cease to have effect and an administrator cannot be appointed. If there is no floating charge holder, the company/directors file the 'notice of appointment' at court together with a statutory declaration stating that the application meets the criteria set out in paragraph 25.

624.     In both cases, this must be accompanied by a statement from the administrator consenting to act and stating that, in their opinion, an objective of the administration is reasonably likely to be achieved. Following this, the administrator is automatically appointed and takes office once the 'notice of appointment' and accompanying documents are filed at court. The company or directors must then notify the administrator of their appointment.

625.     If, for whatever reason, the administrator's appointment is discovered to be invalid, the court may order the person who made the appointment to indemnify the administrator against liability (paragraph 32).

Administration application - special cases

626.     Paragraph 33 provides for a floating charge holder to apply to court for an administration order without the need to demonstrate that a company is or is likely to become unable to pay its debts. However, the court must be satisfied that the applicant would be entitled to appoint under paragraph 12 (out-of-court appointment by the holder of the floating charge).

627.     If there is a winding-up order in relation to the company that would prevent an out-of-court appointment, the floating charge holder can still apply for administration through the court. If an administration order is made, the court will then discharge the winding-up order (paragraph 35). The liquidator may present an application for administration (paragraph 36).

628.     Paragraph 37 sets out that, if an administrative receiver (AR) is in office, the court must dismiss an application for administration unless:

  • the appointee of the AR consents to the administration order; or

  • the court thinks that the appointee's security may be set aside if an administration order were made.

Effect of administration

629.     Paragraph 38 provides that, if the court makes an administration order, it shall dismiss any outstanding winding-up petitions that have not already been dealt with. However, if a company goes into administration as a result of a floating charge holder's appointment of an administrator, then any winding-up petition that has not been dealt with shall be suspended.

630.     As already mentioned, paragraph 37 sets out that, if an AR is in office, the court must dismiss an application for administration unless the appointee of the AR consents to the administration order or the court thinks that the appointee's security may be set aside if an administration order were made. Paragraph 39 provides that, on the making of an administration order, an AR will vacate office, and a receiver will do so if requested by the administrator. The paragraph also secures the AR's and receiver's right to remuneration and any entitlement to an indemnity that they may have had, ahead of the claims of the security-holder who appointed them. However, the right to payment is subject to the moratorium under paragraph 41.

631.     Paragraphs 40 and 41 provide that, once a company is in administration (i.e. an administration order has been made or the administrator has been appointed following the relevant filings by the directors, the company or the qualifying floating charge holder), the moratorium, which is a feature of administration, takes effect. Under paragraph 40 this means that a resolution cannot be passed, or an order made, to wind up the company except in certain circumstances (i.e. compulsory winding-up orders made on public interest petitions).

632.     Paragraph 41 provides that no steps to enforce their rights can be taken by creditors without the consent of the administrator or the permission of the court.

633.     Paragraph 42 provides that the moratorium referred to in paragraphs 40-41 will apply from the date that the application for the administration, or the notice of intention to appoint, is filed at court. The interim moratorium does not stop certain specified actions.

634.     Paragraph 43 sets out that, while a company is in administration, every business document (e.g. invoices, orders for goods and services or business letters) issued by, or on behalf of, the company or the administrator must identify the administrator and state that the affairs, business and property of the company are being managed by him or her.

PROCESS OF ADMINISTRATION

635.     A diagram showing the process of administration is at Annex E.

636.     Paragraphs 44-46 provide that, in all cases, once the administrator has been appointed, he or she will send notice of the appointment to the company and its creditors as soon as is reasonably practicable and send notice to the Registrar of Companies within seven days of the appointment. He or she will also require, by notice, a representative of the company (e.g. officer of the company, employee) to provide a statement of the company's affairs within ten days of the notice being received. This statement must be verified by a statement of truth and give particulars of the company's property, debts and liabilities, and the details of each creditor and their security.

Administrator's proposals and meeting of creditors

637.     A diagram showing the conclusion of administration is at Annex F.

638.     Paragraph 47 provides that, within 28 days of the administration commencing, the administrator is required to make a statement setting out proposals for achieving the purpose of administration, although this period can be extended with the permission of the court or with the creditors' agreement (see paragraphs 105 and 106). The administrator will send a copy of the proposals to the Registrar of Companies, the company's creditors and every member of the company (the last obligation may be fulfilled by publishing a notice). In cases where the business of the company had to be sold under a short timescale to maximise the economic value, the administrator will report these facts to the creditors in his or her proposal.

639.     Each copy of the administrator's proposals sent to creditors must be accompanied by an invitation to an initial creditors' meeting, which must be held within six weeks of the administration commencing, and on a prescribed period of notice (paragraphs 48 and 49). The time periods may be extended with the permission of the court or the consent of creditors (see paragraphs 105 and 106). If the administrator does not consider that it is reasonably practicable to rescue the company and/or achieve a better result for the creditors than on a winding-up, his or her statement must state why (paragraph 47).

640.     The administrator's proposals will take into account the objective of administration, i.e.:

a)     rescue the company (paragraph 3(1)(a));

b)     if that is not reasonably practicable, achieve a better result for the company's creditors as a whole than would have been achieved if the company were wound up (without first being in administration) (paragraph 3(1)(b));

c)     if it is not reasonably practicable to achieve 3(1)(a) or 3(1)(b), realise the company's property and make payments to preferential and secured creditors (paragraph 3(1)(c)).

641.     The administrator will present a copy of his or her proposals at the initial creditors' meeting. If the administrator concludes that the company can be rescued as a going concern, he or she will put the proposal to the creditors and they will decide whether to accept an arrangement under which they will agree to accept less than full payment of their debts. This will usually be through a CVA or a scheme of arrangement under section 425 Companies Act 1985. The creditors could decide to reject the proposals or, with the consent of the administrator, amend them.

642.     If company rescue is not deemed reasonably practicable, the administrator will explain why this is so, and put the proposal to the creditors setting out how he or she plans to achieve a better result for the company's creditors as a whole (e.g. as a result of selling the company's businesses as going concerns to one or more buyers). The creditors will vote on whether to accept, modify or reject the proposal.

643.     Where it is anticipated that there will be no funds available from the insolvent estate for unsecured creditors, outside those flowing from the abolition of Crown preference, the administrator will not be required to call a meeting of the creditors. However, within the prescribed period, such a meeting may be requisitioned by creditors whose debts amount to at least 10% of the total debts of the company (paragraph 50).

644.     An administrator's statement of proposals may not include any proposal that affects the right of a secured creditor to enforce his or her without his or her consent. In addition, the statement of proposals may not include any action that would result in a preferential debt being paid otherwise than in a priority to its non-preferential debt (paragraph 72).

645.     A creditors' meeting may only modify the administrator's proposals with his or her consent (paragraph 51). The administrator cannot subsequently make any substantial revisions to the proposals without first obtaining the agreement of the creditors (paragraph 52).

646.     After the conclusion of the initial creditors' meeting (and any subsequent meeting), the administrator will report any decision taken to the court and the registrar of companies. If the creditors fail to approve the proposals, the court may provide that the administrator's appointment shall cease to have effect, adjourn the hearing conditionally or unconditionally, make an interim order, or any other order deemed appropriate (paragraph 53). Paragraph 55 makes provision for the establishment of a creditors' committee.

647.     Anything that is required to be done at or by a creditors' meeting may be done by correspondence, including communicating electronically and by telephone or fax (paragraph 56 and 109).

Functions of the administrator

648.     Paragraph 57 provides that the administrator may do anything necessary or expedient for the management of the affairs, business and property of the company. Schedule 1 to the Insolvency Act 1986 sets out the powers of the administrator.

649.     Paragraph 59 provides that the administrator may remove or appoint a company director.

650.     An administrator may make payments to secured creditors and preferential creditors without permission of the court (paragraph 63). He or she may make payments to unsecured creditors with the leave of the court or payments from the ring-fence fund without leave of court (paragraph 64). On appointment, an administrator is required to take on custody or control of all the property to which he or she thinks the company is entitled (paragraph 66).

651.     Paragraph 69 provides that the administrator may dispose of property, subject to a floating charge (as created), as if the property were unencumbered, without the consent of the floating charge holder. However, the floating charge holder has first call on the proceeds of sale.

652.     Paragraph 70 provides that the court may give the administrator the power to override the rights of the holder of a fixed security over the company's property and the power to dispose of the property in question as if it were owned by the company. However, the holder of the fixed security has first call on the proceeds of sale.

653.     Paragraph 71 provides that the court may give the administrator the power to sell property subject to a hire-purchase agreement as if the property in question were owned by the company. However, the hire-purchase creditor has first call on the proceeds of sale.

Challenge to the administrator's conduct of the company

654.     Paragraph 73 provides that any creditor or member of a company in administration may apply to the court if he or she believe that the administrator has acted, or proposes to act, in a way that could unfairly harm his or her interests.

655.     The court may grant relief, adjourn the hearing conditionally or unconditionally or make an interim or other order deemed appropriate. However, an order may not be made if it would impede or prevent the implementation of an approved voluntary arrangement or an arrangement sanctioned under section 425 Companies Act 1985, or proposals under paragraphs 51-52, where the challenge is made more than 28 days after the approval of those proposals.

Misfeasance

656.     An interested party may apply to the court if he or she considers that the administrator has misapplied or retained the company's property, has become accountable for property, has committed a breach of a fiduciary, or other duty in relation to the company, or has been guilty of misfeasance. The court may order the administrator to repay, restore or account for the property, pay interest, or contribute by way of compensation to the company's property for breach of duty or misfeasance (paragraph 74).

Ending administration

657.     The administrator will automatically vacate office three months after the date the administration commenced. However, this term may be extended for an additional period of up to three months with the consent of creditors. Alternatively, the administrator can apply to court for an extension for as long as deemed necessary by the courts (paragraph 75 and 77). An extension may not be made not be made once the administrators term of office has ended (paragraph 76).

658.     The administrator is required to apply to the court to end the appointment if he or she thinks that the purpose of administration cannot be achieved, that the company should not have entered into administration or if required to do so by a creditors' meeting (paragraph 78).

659.     If the administrator thinks that the purpose of administration has been sufficiently achieved he or she will file notice with the court and the Registrar of Companies and send copies to all the company's creditors. The administrator's appointment will end when the notice is filed (paragraph 79). Paragraph 80 makes provision for a creditor to apply to the court to have an administration stopped if he or she considers that the appointment was made under an improper motive.

660.     Paragraph 82 allows the administrator to end the administration and convert the proceedings into a voluntary winding-up. This will occur if the preferential and secured creditors have been paid all to which they are entitled, and there is money available for the unsecured creditors. The administrator will file a notice with the Registrar of Companies and, as soon as is reasonably practicable, send a copy to each of the company's creditors. Once the notice has been filed, the administrator's appointment ends, the company proceeds to undergo a creditors' voluntary winding-up and the administrator becomes the liquidator of the company, unless the creditors have appointed an alternative liquidator.

 
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Prepared: 26 March 2002