Company administration is directed at rescuing companies as going concerns. Administration can, since the Enterprise Act 2002, be commenced without a court hearing, although a number of formalities must be adhered to and the option of a court hearing still remains. An administrator can be appointed by the company or its directors, the holder of a floating charge or by an administration order of the court.
The three main objectives with administration are, in this order:
- to rescue the company as a going concern; or
- to achieve a better result for the company's creditors as a whole than would be likely if the company was wound up; or
- to realise property in order to make a distribution to one or more secured or preferential creditors
While a company is in administration there is a moratorium, on creditor actions and no resolutions may be passed for the winding up of the company.
A pre-packaged (or ‘pre-pack’) sale, is an arrangement under which the sale of all or part of a company’s business or assets is negotiated with a purchaser prior to the appointment of an administrator, following which the administrator effects the sale immediately on, or shortly after, appointment. They are a means by which administrators realise the assets of an insolvent company.
Pre-pack sales are executed by administrators, who must be qualified to act as licensed insolvency practitioners. They are required to exercise commercial and professional judgement in deciding how best to realise the assets of insolvent companies and maximise the return to creditors.
Pre-pack sales are generally executed before the insolvency of the company becomes widely known – this can preserve asset values and jobs that may otherwise be lost, and can help to enable a viable business to continue.
The courts have held that administrators have the power to sell the assets of an insolvent company without prior reference to the general body of creditors. Ultimately, administrators act under the supervision of the court, and it is open to creditors or members to apply to the court if they believe that the administrator has acted in a way so as to unfairly harm their interests.
It is sometimes the case that the best offer for the business or assets of an insolvent company may be from the existing directors or management team. There is nothing in law to prevent a director of a company that has failed from forming a new company, provided they are not disqualified, personally bankrupt or the subject of a bankruptcy restriction order or undertaking. There are, however, measures in place to ensure that the privilege of limited liability is not abused.
Administrators are obliged to explain to creditors the background to their appointment and the reasons why they considered that a ‘pre-pack’ sale would be the best outcome for creditors. Administrators will not only have to reveal the name of the purchaser of the business and the price paid, they will also have to provide details of any connection that the purchaser had with the former directors or shareholders and the price paid.
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