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Administration, as a legal concept, is a procedure under the insolvency laws of a number of common law jurisdictions. It functions as a rescue mechanism for insolvent companies and allows them to carry on running their business. The process – an alternative to liquidation – is often known as going into administration.

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United Kingdom

In United Kingdom law, the administration regime is governed by the Insolvency Act 1986, as amended by the Enterprise Act 2002. An "administrator" can be appointed without petitioning the court by the holder of a floating charge (created since 15 September 2003), by the company or by its directors. Other creditors must petition the court to appoint an administrator. The administrator must act in the interests of all the creditors and attempt to rescue the company as a going concern. If this proves impossible she or he must work to maximise the recovery of the creditors as a whole. Only then may the administrator attempt to realise property in favour of one or more secured creditor. Administration is analogous to going into "Chapter 11" in the United States, although there are certain key differences, mainly stemming from the fact that English law does not include the debtor in possession concept. During the reorganisation period, as a result, the administrator usually runs the business rather than the directors, and any additional liquidity requirements effectively have to be met by funds provided by existing creditors rather than by any super-senior 'DIP financing'.

The administrator is an officer of the court and an agent of the company, and is not personally liable for any contracts she or he makes on behalf of the company. He has the power to do anything necessary or expedient for the management of the affairs, business and property of the company.

The new administration regime introduced by the Enterprise Act 2002 replaces the previous situation where administrative receivership was available as an alternative to administration, which has traditionally been a more rescue-oriented insolvency regime. This regime allowed the holder of a floating charge to appoint an administrative receiver to realise assets in his favour, and also to block an administration order sought by a borrower. This was felt to be too favourable to the floating charge holder at the expense of other creditors. Holders of a floating charge created prior to 15 September 2003 retain their right to appoint an administrative receiver, but all purported rights to do so created after that date will be construed as rights to appoint an administrator (subject to certain specific, rare exceptions).

A court order is issued that forbids any form of legal or insolvency action without the court's permission. An application to the court for an administration order may be made by the company, the directors, a creditor or any combination of them. The Enterprise Act 2002 amended the Insolvency Act 1986 to provide an out-of-court process to appoint an administrator to the holder of a floating charge or the company or its directors. This is considerably cheaper and simpler than the previous system, which involved an application to court.

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An Administration Order

In the UK, an administration order is a process designed to protect limited companies from their creditors while a debt restructuring plan is carried out and presented to creditors and courts. This administration order process requires a licensed insolvency practitioner to act as the administrator appointed by the court.

Pre-pack administration

A pre-pack is the process of selling the assets of a company immediately after it has entered administration. It is most likely that the previous directors or management purchase the assets of the company from the administrator and set up a new company.

This process has advantages in that it enables the administrator to realise a greater amount for the assets due to business continuity and the goodwill of the company are preserved. The employees of the company are also transferred to the new company preserving jobs.

Pre-packs have attracted criticism because of the appearances it gives to unconnected parties that the company has just continued without its creditors. SIP 16 was introduced in January 2009 to assist Insolvency Practitioners in pre-pack cases.[1] It was designed to make the process more transparent for creditors and to ensure that fair value was obtained for the assets.

In November 2009, the Office of Fair Trading announced a [2]study into corporate insolvencies, with particular focus on pre-pack administrations. It will report on whether the insolvency market is operating efficiently, with enough freedom of competition between insolvency practitioners and whether consumers and creditors are being treated as fairly as possible.

A recent example of a pre-pack is the sale of the assets of Cobra Beer to Coors immediately after Cobra Beer entered administration. This allowed the brand to continue, save jobs [3] but also leave suppliers out of pocket by an estimated £75 million.

Individual Administration Order in England, Wales and Northern Ireland

In this process, a debtor who has enough money left over after priority creditors and essential expenses, may may be able to arrange an individual voluntary arrangement.[4] (Debtors with less serious problems may prefer a debt management plan).

Australia

In Australian law, administrators cannot be appointed by the Court, and are personally appointed by the director(s) of the company. There are many insolvency hotlines to assist with the strategies for directors.

Administrators are personally liable for debt incurred. There is a seven-day window of opportunity to determine which assets are required to run the business.

Secured creditors have a ten-day decision period to enforce their security charge otherwise they will be precluded from enforcing their security during the administration.

There are currently legislative changes taking place that affect administration and other forms of insolvency in Australia.

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See also

Notes


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