Is it true that a company can only go into administration if it is unable to pay its debts?

A company may go into administration if it is in breach of the terms of a qualifying floating charge. Apart from this it can only happen if it is unable to pay its debts or is unlikely to be able to pay its debts. The answer to the next question explains what this means.

What does 'unable to pay its debts' mean?

It has a legal meaning that differs in different parts of the United Kingdom. It does matter because in most cases a company can only go into administration if it is shown that it is unable to pay its debts, or is unlikely to be able to pay its debts. In England and Wales it means that one of the following applies:

It has received a demand in the prescribed form for a debt of at least £750, and has not made payment for a period of at least three weeks.

Execution or other process issued on a judgment decree or order of any court in favour of a creditor of the company is unsatisfied in whole or in part.

The company is unable to pay its debts as they fall due.

The amount of the company's assets is less than the amount of its liabilities.

What powers does an administrator have?

An administrator has very wide powers that include the following:

He may appoint and remove directors.

He takes over the powers formerly exercised by the directors.

He may call a meeting of members.

He may borrow money.

He may use the company seal.

He may bring actions in the name of the company.

He may defend actions in the name of the company.

He may sell company property.

What are the consequences of a company going into administration?

The consequences take effect immediately. If the court does not confirm the administration, they cease to apply. The following are the main consequences:

The company may not be wound up. Any winding up proceedings in progress are frozen.

No claims for recovery of debts may be commenced and any that are in existence are frozen.

No steps may be taken to enforce judgments that have been obtained. This includes action by a High Court Sheriff or a county court bailiff.

Property subject to hire purchase or lease agreements may not be repossessed.

No security may be enforced. This means, for example, that a bank may not appoint a receiver to safeguard its security.

No goods subject to retention of title clauses may be repossessed by suppliers.

I am a director of a company that is going to go into administration. What will my powers be?

The administrator will run the company and your position will be like that of a manager under his authority. You will have as much power as he allows you to have.

I am a director of a company in administration. Can I be dismissed by the administrator?

Yes.

One of our customers is in administration. What powers do we have?

Unless the court gives you special permission, which is unlikely, you may not commence legal action to recover money owing to you, legal actions that have commenced are frozen and no goods subject to retention of title clauses may be repossessed. This does not leave you many options but you do not have to make new contracts with your customer and, depending on the strength of your position, this may give you some leverage with the administrator. If you are a key supplier and the administrator needs you badly, you can negotiate from a position of strength. If, on the other hand, you supply mince pies for the Christmas party and it is February, your bargaining power is virtually non-existent. You may just possibly take some comfort from the thought that the administration is for the benefit of the creditors, including you.

Is an administrator personally liable for contracts that he makes on behalf of the company?

No he is not. However, an administrator is a qualified, licensed professional person and it is extremely unlikely that you would not be paid for orders that he places.

What is a pre-pack administration?

Many administrations are highly controversial, so called pre-pack administrations. This involves a pre-arranged plan for the administrator to sell the business, freed from its debts. In many cases the buyers are the directors or other people associated with the company. Outraged creditors frequently object and mutter about phoenix companies and dirty dealing. The counter argument is that such an arrangement can be in the interests of the creditors and fulfil the objectives of administration. It is also pointed out that Licensed Insolvency Practitioners are licensed professionals with professional standards.

 
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