Administration of the Insolvent Company to aid Corporate Recovery
Administration is the process of putting a company under the management of a competent manager who can run the business as a going concern in order to aid business recovery of the insolvent company to a level where the company is no longer insolvent. The aim is to give creditors a better outcome in terms of the repayments they can recover which would likely be better as the company is still running to generate revenue to repay creditors.
Administration differs from liquidation in that the end goal of administration is restoration of the company and payment of debts without terminating the company (similar to the other insolvency remedy of obtaining a moratorium during the period of effecting a corporate voluntary arrangement) as opposed to dissolution of the company which is ordinarily the consequence of a liquidation process – terminating the company’s existence due to its insolvency.
The administrator also works on corporate governance during the pendency of insolvency by supervising the acts of directors and officers of the company and formulating corporate restructuring where this is necessary to improve operations of the company.
Procedure for Making an Administration Order over an Insolvent Company
The company, its directors, or a qualifying creditor may appoint the appropriate administrator.
The court may also make an administration order upon application by a qualifying creditor. A liquidator may also make the application to the court and the effect of this is to discharge a liquidation order subsisting against the company.
Effect of ongoing Administration on the Insolvent Company
As administration and liquidation processes result in conflicting ends, any application for liquidation against the company shall be suspended during the administration. Additionally, voluntary winding up of a company may not be commenced or continued during the pendency of the administration order.
A person may only sue or execute a court order against the company upon the consent of the court or the administrator in charge. Similarly, a landlord cannot execute or seize his premises leased to the company under administration without this consent. This moratorium on legal process against the company during the pendency of an administration is to give the company breathing room to run its business without interference and pay back its creditors while trying to carry out normal business.
How Administration of the Insolvent Company is Conducted
Once the administrator is appointed he shall give notice of the appointment to the company and its creditors. The administrator shall examine the company’s affairs and dealings on the basis of a report prepared by the company’s officers. The administrator shall prepare proposals for dealing with the liabilities of the company owed to creditors under a distribution plan.
The creditors may approve the administrator’s plan as presented or may propose modifications to the plan. Creditors may appoint a creditors’ committee to protect their interests with regard to the administration including assessing the performance and effectiveness of the administrator
Role of the Administrator during Corporate Insolvency
- From the time of his appointment, the administrator assumes control of the assets of the company whether or not in the possession of the company. He has a role to prevent the dissipation, waste and unlawful disposal of the assets of the company.
- The administrator is mandated to come up with a plan for distribution to the creditors during the period of administration. This proposal shall be presented to the creditors for discussion and may be adopted as is or with modifications put forth by the creditors.
- The administrator is also mandated to manage the affairs of the company as a going concern in order to generate more revenue to pay off the debts of the company.
- The administrator may deal with certain collateral issued to creditors as may be sanctioned by the court if it is necessary for the effective administration of the company.
- The administrator is entrusted with protecting the rights of creditors taking into account their respective priorities to repayment of debts owed to such creditors. The acts of the administrator should not infringe on the rights of any creditor unless they consent otherwise. The administrator may convene creditors’ meetings from time to time to discuss the progress of the administration of the insolvent company.
Can a Company under Administration be dissolved?
During the course of administration, the administrator may find out and conclude that the company has no assets that will allow a distribution to its creditors. The administrator shall then notify the Official Receiver of the lack of assets and once notified, the administration process will end and the company will stand dissolved a few months later.
The rationale of dissolving a company that has been under administration without any assets is that it is insolvent and completely unable to pay its debts, therefore there is no clear value in running such a company as a going concern.
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