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Q - What is insolvency?
A - Insolvency arises when individuals or businesses have insufficient assets to cover their debts, or are unable to pay their debts when they are supposed to.
Q - What procedures are open to an insolvent company?
A - These fall into six main categories. The first four provide the potential for the rescue of the company or its business, while the last two do not:
Q - What is administration?
A - Administration is one of a number of formal English insolvency procedures.
There are three entry routes into administration in England:
Administration stops any legal action or process against a company from proceeding, unless the Administrators or the English Court give permission. This means that creditors can’t take legal action against a company in administration to recover outstanding amounts.
Q - What is the purpose of the administration?
A - An Administrator must perform his functions with the objective of -
The Administrator must perform these functions in the interest of the company’s creditors as a whole.
Q - What will happen next?
A - The Administrators will initially review the company’s position and collect information about the company. The Administrators will assess whether there is there is the support (the employees, the suppliers, the customers and a funder if required) to continue to trade the business.
The Administrators will take over the day to day control and management of the company.
Q - I am owed money, what notification will I receive?
A - The Administrators will write to all known creditors of the company (as recorded by the company) as soon as is reasonably practical to inform them formally of the appointment.
The Administrators will send a report to all known creditors with 8 weeks of appointment. This report is known as the Administrators’ proposals and will outline steps taken by the Administrators to date and the strategy going forwards.
The Administrators are also required to provide a written update on the administration to all known creditors every 6 months. This report will be sent within one month of every 6 month anniversary or earlier if an Administrator vacates office or an extension to the administration is granted.
Q - What is a pre-pack?
A - A pre-pack is a shortened form of the phrase “pre-packaged administration”. A pre-pack is a deal to sell the assets of a failed company, which is agreed prior to the insolvency, and is then usually completed almost immediately after the appointment of the Administrators.
It can be the best way of preserving value for the business, creditors and shareholders. If a business enters administration it may result in disruption, uncertainty and a real certainty that the business would cease to operate, meaning losses to all stakeholders.
A pre-pack transaction can mean a smooth transition with enhanced realisations for creditors and the preservation of value for goodwill and the brands of the business.
If a pre-pack is applicable in an administration where you are a creditor, you will be sent information on why the pre-pack was used when you are notified of the appointment.
Q - I am an employee, how does the administration affect me?
A - Employees will be addressed at a local level and all employees will be contacted in writing in due course. If you are an employee and have a query, please contact your local Human Capital representative at the company in the first instance.
Q - What happens if I owe the company money?
A - Your debt will still be due and, if you pay by cheque, please forward payment in the usual way. If you pay by telegraphic transfer, or some other direct payment method, the Administrators will set up new bank accounts for the company and will contact you in relation to the new bank details as soon as they are available.
Q - Will the company still supply me post administration?
A - All customers with ongoing or outstanding purchase orders or supply contracts will be contacted individually by a representative of the Administrators.
Q - What happens if the company owes me money?
A - On the date of the administration, all amounts that the company owes are frozen. The company’s assets will be realised and the proceeds, after the costs of the administration, will be allocated to the creditors depending on what type of creditor they are.
Q - How do I know what kind of creditor I am?
A - There are four main types of creditor:
Secured creditors have security registered at Companies House. When they have a fixed charge over an asset, the secured creditor will be paid out of the realisations from those specific assets, after the costs of realisation have been deducted. When they have a floating charge over an asset, the secured creditor will be paid out of the realisations from those assets, after the costs of realisation, the preferential creditors have been paid in full and the prescribed part (see below) has been set aside.
Preferential creditors primarily consist of employees for arrears of wages, accrued holiday pay, unpaid contributions to occupational pension schemes and state scheme premiums, all within certain limits. Preferential creditors rank ahead of all other creditors when realisations are achieved from assets where there is no fixed charge registered.
Unsecured creditors are all other non-secured and non-preferential creditors. These are usually the normal “trade” creditors. They rank below Preferential and Secured creditors, with the exception of when the prescribed part is applicable (see below).
Shareholders / members will be the last class of creditor to receive a distribution and they will only receive a distribution after everyone else has been paid in full.
Q - What is the prescribed part?
A - When a secured creditor has a floating charge registered after 15 September 2003, a proportion of the funds available to them is set aside for distribution to unsecured creditors. This is the prescribed part. (Please note there are some Administrations where there are pre 15 September 2003 floating changes and consequently NO prescribed part.)
Insolvency legislation sets out how the prescribed part is calculated and if it is applicable further details will be provided in the Administrators’ proposals and reports.
Q - Will there be a meeting of creditors?
A - If a meeting of creditors is called, details will be sent in the Administrators’ proposals. The purpose of the meeting is to allow the creditors to consider and vote on the Administrators’ proposals. The meeting can also elect a committee of between 3 and 5 creditors’ representatives to assist and oversee the Administrators.
If a meeting isn’t called, the reason will be given in the Administrators’ proposals and details will be provided at this point in relation to what a creditor needs to do if they wish to call a meeting.
Q - Can you provide me with an estimate of the timeframe for reviewing my claim and paying a dividend?
A - The administration process is complex and it takes time to assess the company’s position and provide an estimate of the quantum or timing for reviewing claims and making a distribution. The Administrators will include an update of dividend prospects and, if possible, a timeframe in their proposals and reports.
Q - Will you refund the costs incurred in preparing a claim?
A - We are unable to refund the costs in preparing a claim. Consequently, we cannot refund any expenses incurred in obtaining information necessary to make a claim.
Q - Will I get paid for services or goods I have provided before the date of the administration?
A - You will rank as an unsecured creditor (see above).
Q - Should I continue providing services or supplies after the date of the administration and how do I know I will be paid?
A - The company will pay for goods and services rendered to the business after the date of our appointment as Administrators against an appropriately authorised purchase order or letter of undertaking.
Q - I have goods on site for which I have not been paid. I am coming to take them away as I retain title to all goods provided until I am paid.
A - You are not entitled to take away these goods until the Administrators have determined retention of title issues. This involves a process of identifying the stock and reviewing the supply terms. Please contact a representative of the Administrators detailed on the webpage for the company of whom you are a creditor.