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Enterprise Act 2002

The purpose of administration

647.In order to clarify the purpose of administration and to place greater emphasis on company rescue, paragraph 3 replaces the existing four statutory purposes under section 8(3) Insolvency Act 1986. Under a single overarching purpose, which will apply to all cases of administration, the administrator will be required, where he or she thinks it is reasonably practicable, to carry out his or her functions with the objective of rescuing the company as a going concern (rescuing the company in this context is intended to mean the company and as much of its business as possible). Where that is not reasonably practicable or that objective would not provide the best result for the company’s creditors as a whole, the administrator may pursue the second objective referred to below. A hypothetical example of a reasonably practicable rescue might be:

Company A is operating at a profit and has excellent products, a loyal customer base and a healthy order book.  However, major investment in a new IT system, which is late and over-budget, has knocked the company off its business plan, its cash flow has suffered and it is unable to pay its debts.  The company has been placed in administration and the administrator has had an offer for its business that would provide sufficient funds to pay the secured creditors and give 35p in the pound for unsecured creditors. However, the administrator has determined that the problems are short-term and they can be resolved and will not have any ongoing effect.  The company’s bankers have given their support to the administrator’s plans to continue trading, the company’s business is profitable and the administrator is confident that the company can be rescued by trading its way out of its current financial difficulties, and provide 65p in the pound return for unsecured creditors within 12 months.  The administrator puts his or her proposal to the creditors.

648.An example of a case where a rescue would not be reasonably practicable is one where it is clear that the only viable options depend on the continuing support of the company’s bankers. The administrator knows that this support will not be forthcoming and that there is no alternative means of financing the company. Whether a company rescue is a reasonably practicable option is a matter of commercial judgment and, on the basis of the case law in relation to similar decisions under the administration procedure prior to commencement of the relevant parts of this Act, it is envisaged that the courts will not seek to criticise the exercise of the administrator’s commercial judgement, except in cases where bad faith can be established or the decision taken was one that no reasonable administrator would have taken. (As to the courts’ attitude in relation to commercial matters, see for example, re: T&D Industries plc (in administration) [2000] 1 BCLC 471.)

649.Company rescue is most likely to involve the creditors agreeing to the company entering a CVA or a scheme of arrangement under section 425 of the Companies Act 1985. For the purpose of these sections, a proposal that would result in a ‘shell’ company remaining would not be considered a rescue.

650.If the administrator thinks that a company rescue is not reasonably practicable, or would not achieve the best result for the creditors as a whole, he or she will seek a better result for the creditors than on a winding-up. This might encompass situations where the company’s individual businesses are broken up and sold to one or more buyers as going concerns in order to achieve this better result for creditors. Assets of the company may also be sold other than on a going concern basis. A hypothetical example might be:

Company B has good products, and a sound customer base.  The company is making losses, its plant and machinery are outdated, and its overheads and debts have been rising for some time.  The company has been placed in administration and the administrator has determined that there are no funds available to maintain its entire trading operation or invest in new machinery and it is therefore not reasonably practicable to rescue the company.  The administrator has reviewed the company and determined that a sale of its businesses on a going concern basis would provide a better return than a break-up sale of its assets. The administrator markets the businesses and the best offer he or she receives would provide sufficient funds to pay the secured creditors and give 40p in the pound for unsecured creditors. The administrator reports to the creditors at a meeting and explains why it was not reasonably practicable to rescue the company.

651.The purpose specified in paragraph 3(1)(c) deals mainly with those cases where the company is not viable and has no business that can be sold as a going concern. All that can be done is to sell the company’s remaining assets in order to make a distribution to one or more secured or preferential creditors. A hypothetical example might be:

Company C is a service company whose business and reputation were built around its excellent standards of customer service.  But a number of key personnel have recently left, the quality of the company’s service and its reputation have suffered badly, customers have become dissatisfied and the company is no longer able to attract and retain business.  It has been making losses for a number of months and is unable to pay its debts.  The company is then placed in administration.  The administrator reviews the company and concludes that its business is not viable and a sale is not possible.  The administrator markets the company’s assets and realises funds that are sufficient to make a part-payment to the secured creditors, and there are no funds available to pay unsecured creditors, except for those resulting from the operation of the ring-fence (see section 252).  The administrator reports to the creditors and explains why it was not reasonably practicable to achieve either a company rescue or a better return for unsecured creditors.

652.An administrator must have regard to the interests of all creditors. In situations under paragraph 3(1)(c) where there are insufficient funds to pay the unsecured creditors, the administrator may only act if he or she does not unnecessarily harm their interests.

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