Appointment by company or directors

660.     Paragraphs 22-34 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 23(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 24(3));

• the company is or is likely to become unable to pay its debts (see paragraph 27(2)(a));

• there is no outstanding winding-up petition or application for administration in respect of the company (see paragraph 25(a));

• the company is not in liquidation (see paragraph 8(1)(a) and (b)); and

• there is no administrator or administrative receiver in office (see paragraphs 6 and 25(c)).

661.     The 'notice of intention to appoint' will also identify the proposed administrator (paragraph 26(3)). Once the 'notice of intention to appoint' is sent to the floating charge holder and filed at court, an interim moratorium commences (paragraph 44(2)).

662.     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 14). 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 26). 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 27(2).

663.     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' (paragraph 28(2)). 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 27.

664.     In both cases, this must be accompanied by a statement from the administrator consenting to act and stating that, in their opinion, the purpose of 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.

665.     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 34).

Administration application - special cases

666.     Paragraph 35 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 14 (out-of-court appointment by the holder of the floating charge).

667.     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 37). The liquidator may present an application for administration (paragraph 38).

668.     Paragraph 39 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

669.     Paragraph 40 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.

670.     As already mentioned, paragraph 39 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 41 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 43.

671.     Paragraphs 42 and 43 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 42 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).

672.     Paragraph 43 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.

673.     Paragraph 44 provides that the moratorium referred to in paragraphs 42-43 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.

674.     Paragraph 45 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

675.     A diagram showing the process of administration is at Annex G.

676.     Paragraphs 46-48 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 eleven 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

677.     A diagram showing the conclusion of administration is at Annex H.

678.     Paragraph 49 provides that, as soon as reasonably practicable, or, in any event, within 8 weeks 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 consent of the creditors (see paragraphs 107 and 108). 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.

679.     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 as soon as reasonably practicable, or, and in any event, within ten weeks of the administration commencing, and on a prescribed period of notice (paragraphs 50 and 51). The time periods may be extended with the permission of the court or the consent of creditors (see paragraphs 107 and 108). 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 49).

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

a)     to rescue the company as a going concern (paragraph 3(1)(a));

b)     if that is not reasonably practicable, or would not yield the best outcome for creditors, to 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), to realise the company's property and make payments to preferential and secured creditors (paragraph 3(1)(c)).

681.     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.

682.     If company rescue is not deemed reasonably practicable, or would not yield the best outcome for creditors, 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.

683.     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. This will also be the case where the administrator thinks there are funds to pay all creditors in full or that the first two objectives cannot be achieved. 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 52).

684.     An administrator's statement of proposals may not include any proposal that affects the right of a secured creditor to enforce his or her security 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 a non-preferential debt (paragraph 73).

685.     A creditors' meeting may only modify the administrator's proposals with his or her consent (paragraph 53). The administrator cannot subsequently make any substantial revisions to the proposals without first obtaining the agreement of the creditors (paragraph 54).

686.     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, make an order on a suspended petition for winding up, or any other order deemed appropriate (paragraph 55). Paragraph 57 makes provision for the establishment of a creditors' committee.

687.     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 (paragraphs 58 and 111).

Functions of the administrator

688.     Paragraph 59 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.

689.     Paragraph 61 provides that the administrator may remove or appoint a company director.

690.     An administrator may make a distribution to secured creditors and preferential creditors without permission of the court (paragraph 65). He or she may make distributions to unsecured creditors with the permission of the court. The administrator can make a payment if he or she thinks that the payment is likely to assist in achieving the purpose of administration or in accordance with paragraph 13 of Schedule 1 to the Insolvency Act 1986 (paragraph 66). 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 67).

691.     Paragraph 70 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.

692.     Paragraph 71 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.

693.     Paragraph 72 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

694.     Paragraph 74 provides that any creditor or member of a company in administration may apply to the court, firstly, if he or she believes that the administrator has acted, or proposes to act, in a way that could unfairly harm his or her interests. Secondly, if he or she believes that the administrator is not performing his or her functions as quickly and efficiently as is reasonably practicable. The use of the expression "reasonably practicable" conveys the idea that one administration may be very different from another, where it may be practicable to act within a short time in the administration of a simple, small company, that may be entirely impracticable in the case of a large complicated case. Furthermore the courts would be unlikely to entertain claims under this provision relating to trivial delays or that are frivolous or unavoidable or cause no harm.

695.     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 53-54, where the challenge is made more than 28 days after the approval of those proposals.

Misfeasance

696.     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 75).

Ending administration

697.     The administrator will complete the administration as soon as reasonably practicable, or, in any event, within twelve months of the date the administration commenced. However, this term may be extended for an additional period of up to six 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 76 and 78). An extension may not be made not be made once the administrators term of office has ended (paragraph 77).

698.     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 79).

699.     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 80). Paragraph 81 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.

700.     Paragraph 83 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 they are likely to receive (or such has been set aside for them), and there is money available for the unsecured creditors. The administrator will send a notice to the Registrar of Companies and, as soon as is reasonably practicable, file a copy with the court and send a copy to each of the company's creditors. Once the Registrar of Companies has registered the notice, 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 nominated an alternative liquidator.

Dissolution

701.     Paragraph 84 provides that the administrator may take steps to dissolve the company where he or she finds that the company has no further assets to make a distribution to creditors. In which case he or she may send a notice to the Registrar of Companies and send a copy to the court and to each of the creditors. The company is considered dissolved after three months of the registration of the notice. However, it will be open to the court, on the application of the administrator or any other interested person, to defer the dissolution of the company; any such order should be filed with the Registrar of Companies.

Replacing administrator

702.     Paragraphs 87-99 provide for the removal or replacement of the administrator under the different routes into administration and provide for release and priority of the administrator's debts and liabilities.

General provisions

703.     Paragraphs 100 to 111 make general provisions relating to the appointment of joint and concurrent administrators (paragraph 100 to 103), matters of penalties (paragraph 106), time-limits (paragraph 107 to 110) and interpretation (paragraph (111).

704.      Paragraphs 115 to 119 make provision for various issues of relevance to administration in Scotland, in particular, the interpretation of the expressions "filing in court" and "charge", the application of the provisions concerning the disposal of property subject to security and hire purchase agreements, and they provide an express order of priority.

705.     Schedule 17 contains minor and consequential amendments arising out of the changes to administration.

Section 249: Special administration regimes

706.     This section applies to companies for which special arrangements for the administration procedure have been made by applying Part II of the Insolvency Act 1986, with modifications. These special administration schemes are:

• water companies under the Water Industry Act 1991;

• companies to which railway administration orders apply (railway companies under the Railways Act 1993 and companies involved in the Channel Tunnel Rail Link);

• air traffic control companies under the Transport Act 2000;

• London Underground PPP companies under the Greater London Authority Act 1999; and

• building societies as defined by the Building Societies Act 1986.

707.     The section provides an automatic saving provision for Part II as it is presently applied and modified by the various enactments listed above to continue to apply to companies subject to these regimes.

708.     It also allows the Secretary of State (or HM Treasury in the case of building societies), by order, to amend the existing provisions in Part II (and to make consequential amendments of other enactments) as they are applied to the special regimes.

Section 250 & Schedule 18: Prohibition of appointment of administrative receiver & Schedule 2A to Insolvency Act 1986

709.     This section inserts a new Chapter IV after Chapter III of Part III of the Insolvency Act 1986. Schedule 18 introduces new Schedule 2A to the Insolvency Act 1986 (inserted after Schedule 2).

710.     Currently, a floating charge holder, whose security covers the whole or substantially the whole of the company's property, may enforce their contractual right to realise their security by appointing an AR (often simply referred to as a receiver in Scotland). In order to restrict the use of administrative receivership, new section 72A of Chapter IV prohibits, subject to certain exceptions, the holder of a qualifying floating charge (as defined under paragraph 14 of Schedule B1) from appointing an AR. The section applies to any floating charge created on or after the date that it comes into force.

711.     However, there are cases where administrative receivership plays a crucial role. These exceptions to section 72A are set out in sections 72B-72G.

712.     Section 72B provides that an AR can be appointed in pursuance of an arrangement which is, or forms part of, a capital market arrangement (as defined by paragraph 1 of Schedule 2A of Insolvency Act 1986 - see section 250 and Schedule 18), i.e.:

• it involves security that has been granted to a person holding a capital market investment issued by a party to the arrangement; or

• at least one party to the arrangement guarantees the performance of the obligations of another party; or

• at least one party provides security in respect of the performance of the obligations of another party; or

• the arrangement involves the issue of options, futures or contracts for differences.

713.     This only applies if the debt, or expected debt, is at least £50 million and involves the issue of capital market investments as defined by paragraphs 2 and 3 of new Schedule 2A to the Insolvency Act 1986 (paragraph 1(1) of Schedule 18).

714.     Section 72C provides that an AR can be appointed in respect of the property of a project company of a public-private partnership (PPP) project with step-in rights:

• a PPP project is one whose resources are provided partly by one or more public bodies and partly by one or more private bodies; or which is designed wholly or mainly to assist a public body in discharging a function.

• a project has 'step-in rights' if the person who provides finance (including an indemnity) for the project has a conditional right that enables them to assume sole or principal contractual responsibility for carrying out all or part of the project or to make payments so to do.

715.     Section 72D provides that an AR can be appointed if the floating charge is granted over the property of a project company of a utility project with step-in rights.

716.     A utility project is a project designed wholly or mainly for the purpose of a regulated business (e.g. a project that is concerned with a business carried out requiring a licence granted under section 8 Railways Act 1993, or a licence granted under section 7A Gas Act 1986). A full list of such regulated businesses is given in paragraph 10 of Schedule 18.

717.     Section 72E provides that an AR can be appointed in respect of an arrangement in relation to a project company of a financed project with step-in rights. This only applies if the project company incurs a debt of at least £50 million for the purposes of carrying out the project.

718.     Section 72F provides that an AR can be appointed by someone entitled to do so in connection with a market charge within the meaning of the Companies Act 1989; a system-charge within the meaning of the Financial Markets and Insolvency Regulations 1996; and a collateral security charge within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999.

719.     Section 72G provides that an AR can be appointed if the floating charge is granted over a company which is registered as a social landlord under Part I of the Housing Act 1996 or Part 3 of the Housing (Scotland) Act 2001.

720.     Section 72H inserts what will be new Schedule 2A into the Insolvency Act 1986, after the existing Schedule 2. It also gives the Secretary of State the power to amend the new provisions in Chapter IV to Part III of the Act. Specifically, the Secretary of State may, by order:

• insert additional exceptions to new section 72A;

• provide that an exception already provided for shall cease to have effect;

• amend section 72A in consequence of any new exception (or removal thereof);

• amend any of the exceptions 72B-72G;

• amend Schedule 2A.