Must You Pay a Company If It Goes Into Administration?

At times, companies face financial difficulties that may lead them to insolvency or administration. When this happens, their creditors, including their customers and suppliers, may wonder if they still need to pay them or if they will lose their money.

In this article, we will explore the legal and practical aspects of the question “must you pay a company if it goes into administration?” and provide some helpful guidance for those who find themselves in such a situation.

Understanding Administration

Before we delve into the question at hand, let’s first define what administration means. Administration is a formal insolvency process under the Insolvency Act 1986 that aims to rescue a company as a going concern, that is, to preserve its business and assets and repay its debts to the extent possible.

During administration, an insolvency practitioner, known as the administrator, takes control of the company and manages its affairs for the benefit of its creditors. The administrator has a duty to act in the best interests of all the creditors as a whole, not just one or some of them.

Priority of Creditors

One of the key aspects of administration is the priority of creditors, that is, the order in which they will be paid from the company’s assets. The priority is determined by the law and is as follows:

1. Secured creditors, who have a charge or a mortgage over a specific asset of the company, such as a property or a vehicle, have the first priority. They can enforce their security and recover their debt from the proceeds of the sale of the asset.
2. Preferential creditors, who have a statutory priority for certain debts, such as wages, holiday pay, and certain taxes, have the second priority. They can only be paid after the secured creditors have been satisfied and before the unsecured creditors.
3. Unsecured creditors, who do not have any security or preference, have the last priority. They can only be paid if there are any funds left after the secured and preferential creditors have been paid.

Effect on Customers and Suppliers

Now, let’s turn to the question of whether customers and suppliers must pay a company if it goes into administration. The answer depends on the nature and timing of the payment and the terms of the contract between the parties. Here are some possible scenarios:

1. If the payment was made before the company went into administration and the goods or services were provided, the customer or supplier would have a claim as an unsecured creditor for the amount paid. They would need to submit a proof of debt to the administrator and wait for the outcome of the administration. If the company is rescued or sold, they may receive a partial or full payment. If the company is liquidated, they may receive little or nothing.
2. If the payment was made before the company went into administration and the goods or services were not provided, the customer or supplier would have a claim for the return of the payment as a preferential creditor. They would need to contact the administrator and provide evidence of the payment and the non-delivery. If the company is rescued or sold, they may receive a partial or full refund. If the company is liquidated, they may receive a pro rata share of the available funds for preferential creditors.
3. If the payment was made after the company went into administration and the goods or services were provided, the customer or supplier would not have to pay again, but they would not have a claim as an unsecured creditor either. They would need to contact the administrator and provide evidence of the payment and the delivery. If the company is rescued or sold, they may receive a credit for the payment. If the company is liquidated, they would not receive any further payment.
4. If the payment was made after the company went into administration and the goods or services were not provided, the customer or supplier would not have to pay again, and they would have a claim for the return of the payment as a preferential creditor. They would need to contact the administrator and provide evidence of the payment and the non-delivery. If the company is rescued or sold, they may receive a partial or full refund. If the company is liquidated, they may receive a pro rata share of the available funds for preferential creditors.

Legal Considerations

In addition to the above practical considerations, there are some legal rules and cases that may affect the question of whether customers and suppliers must pay a company if it goes into administration. For example:

1. The rule against set-off: This rule states that a customer or supplier cannot set off a debt they owe to the company against a debt the company owes to them unless the debts are mutual and unconnected. This means that if a customer or supplier owes money to the company, they cannot withhold payment of their own debt in the hope of reducing or extinguishing it.
2. The principle of ipso facto clauses: This principle prohibits contracts from including clauses that allow a party to terminate or modify the contract solely because the other party has entered into administration or insolvency. This means that if a contract between a customer and a company contains such a clause, it may be unenforceable or void.
3. The case of Re Nortel Networks UK Ltd: This case clarified the priority of creditors in administration in relation to the distribution of the proceeds of the sale of the company’s intellectual property. The case confirmed that the sale proceeds should be distributed according to the same priority as the company’s other assets, rather than being treated as a separate class of creditors.

Read more: What to do if a company has gone into liquidation owing you money

Frequently asked questions

Conclusion

In conclusion, the question of whether customers and suppliers must pay a company if it goes into administration is a complex one that depends on various factors, such as the nature and timing of the payment, the terms of the contract, and the priority of creditors. While there is no one-size-fits-all answer, it is important for customers and suppliers to be aware of their rights and obligations in such a situation and to seek professional advice if necessary.

By understanding the legal and practical aspects of administration, customers and suppliers can protect their interests and make informed decisions.