Guest article by Jeremy Frost at Frost Group.

Introduction

I have always found it best to consider the law as it relates to Insolvency as being continually in flux. The certainties of life that we all crave just cannot exist long-term in an area of the law where so much pain can be metered out!

Administration, as a process, joined us in 1986. The administrator has an obligation to consider the rights of all creditors by generating a strategy which retains value in a business over which they were appointed. It was initially designed for companies where a bank did not hold sufficient security to allow the appointment of an administrative receiver whose role is (or rather was) very similar.

It became more important after 2003 with the removal of administrative receivership as an option available to banks with floating charges. In a typical fudge, however, much of the power of the banks to control an administrative receiver were transmuted into their control of administrators.

What is administration?

Administration is a court driven process, albeit where a bank has a floating charge it can make an appointment out of court. Once an application is made, court proceedings, including enforcement, cannot be commenced or continued without the consent of the administrator. If the administrator unreasonably refuses to provide his consent, a creditor is entitled to apply to court. The phrase used is “moratorium”.

The purpose of administration is stated in the legislation as either to allow a company to survive, allow for a better result than would be possible in liquidation, or allow for secured creditors to receive a repayment of some or all of their indebtedness. The administrator must quickly develop a set of proposals for creditors to agree which allows one of the purposes to be complied with.

What to do when an enforcement target enters administration?

The starting point for enforcement is not good for creditors, but the administrator does not have the power to turn back time. If you have instructed an HCEO and are mid-enforcement, i.e. you have a controlled goods agreement which is not the subject of fixed charges, then the moratorium acts to protect you, i.e. the administrator cannot ignore your enforcement. Similarly, if you have taken control of goods, then you must hold them pending confirmation from the administration that they may be disposed of.

The strength of your position is very case specific. If the administrator has a desperate need for the goods you have taken control of or the debt secured is materially less than the value of the goods, then the administration will come up with a strategy to ensure your client is paid.

More often however, the case is that the goods, although purchased for significant sums, are just not worth anything like as much when sold second hand. In this scenario, the administrator is likely to either allow the enforcement to continue, leaving you with a unsecured claim in the administration in respect of any balance remaining from the sale, or they will value the items and suggest they be sold by the administrator further to them complying with their proposals. When the goods are sold, an agreed sum would be paid to the creditor via the HCEO.

Conclusions

The appointment of an administrator is designed to protect the position of creditors and to stop individual creditors taking matters int their own hands, thereby destroying value which, if better handled would benefit all creditors.

By its nature, it is a process which is very case specific and claimants in the midst of enforcement are advised to seek legal advice before finalising their strategies.