Reasons Why Administration Cases Fail
- 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 in order to make a distribution to one or more secured or preferential creditors.
From the perspective of the Administrator, an Administration fails if they have been unable to achieve the chosen purpose or complete their Administration. From a director’s point of view, one who is looking to buy back the business, an Administration may have failed if they have not been able to do this successfully. There are a number of hurdles to both of these objectives which will need to be overcome:
- Rejection of the Administrator’s proposals
- Extension refused by creditors
- Trading Deficit
- Failure to find a purchaser
- Pre-pack pool
The biggest potential headache for both the Administrator and the Director is if the Administrator’s proposals are rejected outright. This can be for a number of reasons:
- Connected creditors approve the proposals, however unconnected creditors reject them.
- Creditors generally are dissatisfied by the actions which have been taken or proposed to take.
- Creditors do not respond to the Administrator’s proposals.
- A particularly aggrieved creditor decided that they are going to reject the proposals regardless of what offer is being made.
If the proposals are rejected, there is a short period of time in which they can be modified by creditors into something satisfactory. However failing this, the Administrator must apply to court for directions. This will generally lead to the company being wound up by the court and the actions of the directors and the Administrator being investigated by the official receiver and any appointed liquidator.
Another reason the Administrator may consider the Administration a failure is if it becomes necessary to extend the Administration, but creditors do not approve the extension.
There used to be a real issue where a lack of creditor engagement would lead to extensions not being possible due to no response from creditors and the Administrator would need to go through the costly process of making an application to court. Fortunately, the modernised insolvency rules allow for an extension to be approved by deemed consent if creditors remain silent on the matter.
Where creditors actively oppose an extension to the Administration this can cause the matter to be cut short very abruptly. Dissenting creditors who were overridden at the proposals stage may appear again at this stage expressing their concerns at a time when creditor engagement is much lower than at the proposals stage. This early end to Administration can result in the Administrator failing the achieve the best outcome for creditors.
A large deficit from trading the Administration can be a significant reason for not achieving the purpose of Administration. If there is no resolution to the deficit this can effectively leave the administration insolvent in itself.
Where an Administrator fails to achieve the purpose it is necessary for them to apply to court for a direction. This again will usually result in the company being wound up by the court and the actions of the Administrator being investigated.
A failure to find a buyer for the business may also be considered a failure of the Administration, however to a much softer degree. Often a business concept may be so dated that whilst there may be expressions of interest, there is no credible way of taking it forward in its current form.
An example of this is the BHS Administration. Whilst the business was popular in the 1970’s and 1980’s it failed to adapt to modern tastes and the modern market with the rise of the internet. As a result, whilst there were a number of high-profile expressions of interest, the business had to be effectively sold for parts. Whilst this still generated funds for creditors and achieved the purpose of Administration, it is still regarded as a failure as a huge brand vanished from the high street.
In terms of failure from the perspective of the director, it is also worth mentioning the new pre-pack pool. If a connected party is seeking to buy-back the business via a pre-pack sale they should be offered the opportunity to approach the pre-pack pool for an opinion as to whether the transaction they are proposing should go ahead.
One of three opinions will be provided which are:
- Nothing found to suggest that the grounds for the proposed pre-packaged sale are unreasonable.
- Evidence provided has been limited in some areas, but otherwise, nothing has been found to suggest that the grounds for the proposed pre-packaged sale are unreasonable.
- There is a lack of evidence to support a statement that the grounds for the proposed pre-packaged sale are reasonable.
If the final opinion is the one provided the Administrator will be unlikely to be willing to proceed with the proposed sale and this may be considered a failure from the purchaser’s point of view.
A successful Administration
A key part of a successful Administration will largely fall down to having an Administrator who is able to quickly and diligently adapt to the rapidly changing situation which is presented to them. In order to be successful they will need:
A pre-packaged sale representing best value to creditors with a positive opinion from the pre-pack pool, or
To be able to trade the company for a short period of time, ideally making a small profit, before finding a buyer for the business as a going concern, or
In some rare cases successfully finding an investor who is willing to buy the shares of the company to rescue it as a going concern, or
Successfully implementing a Company Voluntary Arrangement to achieve this purpose.
If creditors then accept the proposals that are put forward as their best option and do not reject any extensions which are necessary to further the Administration process then it can truly be deemed a success.
If you feel you need to find out more about the Administration process, including what Pre-pack Administration is and what other options are available to your business, do not hesitate to contact one of our business rescue experts.