What is the Purpose of Administration?

What is the Purpose of Administration?The purpose of administration proceedings is to rescue and rehabilitate insolvent but potentially viable companies. The word “company” in this chapter should be taken to include LLPs and partnerships, unless indicated otherwise.

The word “director” should be taken to include members of limited liability partnerships and partners. A company is said to be in administration when the appointment of an administrator becomes effective

What is the purpose of an insolvency Administration?

The three statutory purposes are set out at Paragraph 3 to schedule B1 of The Insolvency Act 1986. Those provisions came into force and apply to all Administrations after 15th September 2003.

Schedule B1 of The Insolvency Act 1986 provides that an insolvency Administration of a limited company can only take place if there exists one of three possible “statutory purposes” or three possible outcomes of the Administration.

Three main statutory purposes of an administration

A limited company is only able to enter into administration in one of two ways. If a licensed insolvency practitioner such as ourselves is appointed by the company directors or through a direct application to the court.

There are three main statutory purposes of an administration:

  • Rescuing the company as a going concern, or
  • Achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration), or
  • Realising property inorder to make a distribution to one or more secured or preferential creditors.

The administrator must perform their functions with the first of these objectives in mind, unless they think either:

  1. That it is not reasonably practicable to achieve that objective, or
  2. That the second objective would achieve a better result for the company’s creditors as a whole.

The administrator may perform their functions with the third objective as the intended outcome only if:

  1. They think that it is not reasonably practicable to achieve either of the first two objectives, and
  2. They do not unnecessarily harm the interests of the creditors of the company as a whole. 

The three “statutory purposes” of an insolvency Administration can be seen to be widely drafted. Two things ought to be noted:

  • While the third “purpose” refers to preferential creditors it should be remembered that from 1 December 2020 and debts owed to HMRC, were a deduction has been made, these will now be treated as a secondary class of preferential creditors. This would include for example, VAT, PAYE, NIC and CIS tax.
  • The third “purpose” says nothing about an administrator having the power to pay unsecured creditors. Clause 65(3) to The Insolvency Act 1986 allows an administrator to pay a dividend to unsecured creditors if, and ony if, the court first gives permission. The court may be likely to give such permission if it were to result in a higher dividend to creditors (as a result of reduced costs).

A liquidation may not always follow an administration process, in some cases a CVA may take place.

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