Business insolvency feels like an everyday norm in today’s climate, whether it be a sports club, such as Cardiff Rugby, Wasps and London Irish, or retail stores, including The Body Shop and Ted Baker. If you are a director or shareholder of a business, or even an external creditor, it’s becoming increasingly important to understand the roles and responsibilities of the key people involved in business insolvency – administrators and liquidators.

What is administration?

Administration is an insolvency process often used with the hope of rescuing a business experiencing cashflow issues. Administration allows a company to be reorganised, or for its assets to be realised, under the protection of a moratorium. This is a legal protection which prevents creditors from taking action to enforce their debts during the administration period.

Administration appointments are most commonly made “out of court” by the company, its directors or secured lender. Alternatively any creditor, the company itself or its directors can apply to the court for an administration order.

Under the Insolvency Act 1986, a company must only enter administration with the aim of achieving one of the following statutory objectives:

1. The rescue of the company (or part of it) as a going concern;
2. To achieve a better result for the company’s creditors than if the company were to be wound up; or
3. To realise some or all of the company’s assets in order to make a payment to one or more secured or preferential creditor.

The role of an administrator

Once appointed, the administrator takes control of the company’s business and assets with the aim of achieving at least one of the three statutory objectives mentioned above. They must then prepare proposals setting out how they intend to conduct the administration. The proposals must explain which of the statutory objectives they are aiming to achieve and how they intent to do so. The proposals will then be put to the company’s creditors for approval.

In order to achieve their objectives, an administrator has wide-ranging statutory powers including the ability to:

• Sell / dispose of the company’s property;
• Bring or defend legal proceedings on the company’s behalf;
• Make payments, arrangements and compromises on behalf of the company; and
• Carry out the company’s business.

The duties of an administrator

An administrator is an officer of the court, meaning they are automatically under a duty to act fairly and honourably whilst conducting their role. They must always have regard for the best interest of the company’s creditors and should operate quickly and efficiently in achieving their proposals.

What is liquidation?

Liquidation involves the realisation and distribution of company assets to creditors in order to satisfy the company’s debts. Unlike administration, liquidation is not concerned with rescuing a business as, at the end of the procedure, the company is dissolved.

A company can enter liquidation voluntarily, or alternatively a creditor or other interested party can apply for compulsory liquidation via the court by filing a winding up petition.

The role of a liquidator

During liquidation, a liquidator is appointed to deal with the company’s affairs. They can either be a government official/ civil servant, known as the Official Receiver, or a licensed insolvency practitioner. Their role is to collect and realise company assets in order to distribute funds to the company’s creditors.

Similarly to an administrator, a liquidator has a duty to act fairly and impartially, exercising their powers in an appropriate manner.

The powers of a liquidator

The Insolvency Act 1986 grants liquidators a wide range of powers. Many of these are the same as those of an administrator, however there are some important differences. For example:

• A liquidator has the power to “disclaim” onerous property or contracts; and
• A liquidator’s power to carry on the business of the company is much more limited – they can only do so “so far as is necessary for its beneficial winding up”.

Challenging the conduct of an administrator or liquidator

Despite the extensive powers given to an administrator and liquidator, it is important to remember that they do not have free rein to act exactly as they please. If you are a creditor or member of a company and are dissatisfied with the conduct of an insolvency practitioner, it could be possible to apply to court to challenge their conduct if they are acting in a way which unfairly harms your interests, or if they are failing to act as quickly or efficiently as is reasonably practicable. As administrators and liquidators owe duties to the company’s creditors, it is also possible to bring a claim against them in misfeasance if you believe that they have misappropriated funds or property owned by the company and, in doing so, have breached those duties.

If the court finds in favour of the individual challenging the administrator/ liquidator, they can enforce various remedies such as requiring the administrator to carry out a specific act, requiring them not to do something or terminating their appointment in its entirety.

However, it is also important to remember that administrators and liquidators have a wide discretion to do what is necessary or expedient to manage the company’s affairs, and a court will not take the decision to interfere with that discretion lightly. The right to challenge a liquidator or administrator is intended to be used as a last resort when a director or creditor truly believes and has evidence to suggest that the practitioner has not acted in line with their duties.

If you are a director or creditor of a company and would like to better understand insolvency proceedings, or if you are unhappy with the conduct of a liquidator or administrator, then the Geldards’ insolvency team will be happy to assist and guide you through your concerns.