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Administration in brief

14 August 2018 #Commercial #Corporate


In light of the increasing number of retailers entering insolvency proceedings the spot light is again on the administration process.  This article summarises the administration process and reflects on why it has received recent bad press.

Purpose of Administration

Traditionally, the administration process was used to hold the company and business together while rescue or restructure plans for the company were put in place.  It was seen as an alternative to a straight forward liquidation; it was hoped that by putting a company into administration it would be given breathing space to trade through its difficulties, thereby keeping the company alive, its employees in work and achieving a better return for creditors than as would be achieved in a straightforward liquidation.

Administrators are still free to liquidate and where a rescue is not considered viable, the business and assets can be sold while the company is in administration. The proceeds of the sale are used to pay secured or preferential creditors.

How is the Administration Process Started?

The company, its directors or a creditor (whether secured or unsecured) can all apply to Court to begin the administration process.

Alternatively, the directors or another creditor (usually a bank or commercial lender) which has a floating charge over the company can appoint their own administrator without a Court hearing.

What does an Administrator do?

The administrator takes control of the company and assets and the company is responsible for paying the administrator’s fees. The administrator has 8 weeks to decide a course of action and notify the creditors, employees and Companies House. The creditors will vote on the administrator’s proposal. The administrator will also usually invite other parties such as employees to comment on the proposal.

As noted above, the primary aim of the administrator is to avoid the liquidation of the company however, sometimes this is not possible.

The administrator will evaluate the company and having regard to its duty to act in the way that best promotes the interests of creditors, to:

  • negotiate a Company Voluntary Arrangement (CVA) which will allow the company to continue to trade. This is basically a deal between the company and its creditors, which usually involves the creditors agreeing to write off some of the company’s debts. This also means that control of the company will be passed back to the directors;
  • sell the assets as part of a Creditors’ Voluntary Liquidation and use the proceeds from the assets to pay creditors. At the end of the process, the company will be dissolved; or
  • sell the business as a going concern, which means that clients and contracts are kept on. This also means that at least some of the workforce may be kept on too. Quite often such a sale is called a pre-pack.  The purpose of which is to sell the undertaking as a going concern.  A balance needs to be struck between selling the business and assets quickly enough to ensure continuity of the business and protection of its goodwill but also ensuring that the right buyer has been found for the business and benefit of stakeholders and creditors and also that due process has been followed in identifying that buyer.

House of Fraser and administration

Over the years, the administration process has been criticised by many where it has appeared that those closely linked with the demise of the company in the first instance, are identified through a new vehicle as the buyers of the business and assets from administration.  Many have seen the process being used as a way for the company to avoid creditors and simply “go again” with a clean bill of health. 

Commercial Landlords have also been left with the difficulty of not knowing whether they might get rent post administration, as an expense of the administration, or whether the Company will simply slide into liquidation, thereby loosing time to market the property or forfeit the lease.

Recently, the administrators for House of Fraser have been criticised for the decision to reject an offer from Philip Day to purchase the retailer as a going concern – not because of any link to the pre-administration owner but because of the apparent speed they proceeded with to a different consortium which it has been reported offered less than Philip Day’s bid and because of the concerns surrounding the company’s pension scheme.  The liability for the Pension Scheme now falls to the Pension Protection Fund, following the pre-pack sale.

A spokesperson for the Pensions Regulator stated that they would “monitor the situation very closely”.[1]  There is also mounting concern that not all of the suppliers and concessionaires will be paid.[2]

 

[1] https://www.ft.com/content/3fc045de-9e35-11e8-85da-eeb7a9ce36e4

[2] https://www.ft.com/content/3fc045de-9e35-11e8-85da-eeb7a9ce36e4

Clarkslegal, specialist Commercial lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Commercial matter please contact Clarkslegal's commercial team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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Stuart Mullins

Stuart Mullins
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E: SMullins@clarkslegal.com
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