The administration procedure in the UK was first introduced under the Insolvency Act 1986. This legislation created the administration process as a formal insolvency procedure aimed at rescuing companies in financial distress.
The key purpose of this procedure was to allow struggling businesses to restructure while being protected from creditor actions, to maximise returns to creditors and, where possible, to preserve the company as a going concern.
The Enterprise Act 2002 later streamlined the administration process with a view to making administration the primary insolvency procedure for companies. At the same time, the use of administrative receivership was restricted.
Changes to the Administration Process
In 2003, the United Kingdom implemented significant reforms to its insolvency laws through the Enterprise Act 2002, aiming to foster a “rescue culture” for financially distressed companies and streamline bankruptcy procedures for individuals.
Prior to this, administrative receivership was a common form of insolvency where a secured creditor, often a bank, would appoint a receiver to manage the company’s affairs. However, this approach often led to the closure of businesses, as the receiver was focused on recovering debt for the creditor rather than attempting to rescue the business itself.
Corporate Insolvency Reforms:
Administration Procedure: The Enterprise Act overhauled the administration process, making it the primary insolvency procedure for companies. This shift was designed to facilitate the rescue of viable businesses, allowing them to continue operating while restructuring their debts. The goal was to prioritise company rescue over liquidation, thereby preserving jobs and economic value.
Administrative Receivership: The Act restricted the use of administrative receivership, a process where a secured creditor could appoint a receiver to recover debts, often leading to the company’s breakup. By limiting this practice, the reforms encouraged the use of administration, which focuses on rescuing the company as a going concern.
Floating Charges: The reforms also abolished the preferential status of HM Revenue and Customs in insolvency proceedings. This change ensured a more equitable distribution of assets among creditors.
These changes made administration a more viable option, particularly for small and medium-sized companies. The new process was part of a broader effort to modernise the UK’s insolvency framework, promoting business rescue and providing a fairer system for creditors and debtors.
Individual Bankruptcy Reforms:
Discharge Period: The Act reduced the standard bankruptcy discharge period from three years to one. This change allowed individuals to restart their financial lives more quickly.
Bankruptcy Restrictions Orders (BROs): To balance the reduced discharge period, the Act introduced BROs, which could extend certain bankruptcy restrictions for up to 15 years in cases involving misconduct or dishonesty. This measure ensured that individuals who acted irresponsibly faced appropriate consequences.
What is the Administration process today?
Administration today is designed to give businesses facing financial difficulties a chance to reorganise and potentially continue trading, rather than being forced into liquidation. The key goal is to provide a “breathing space” for companies to stabilise their finances, complete work in progress, and negotiate with creditors.
The administration process was set up with a focus on business rescue, with one of the primary objectives being the protection of jobs. Today, administration has effectively replaced administrative receivership.
The introduction of CVA’s
Additionally, the Company Voluntary Arrangement (CVA) system, which was introduced in 1986, also provides an alternative route for businesses in trouble, enabling them to reach an agreement with creditors for debt repayment. It can also be used as an exit route from Administrations.
Who we are
At McTear Williams & Wood we are a specialist team of expert licensed insolvency practitioners. We have a combined team of 80 employees spread across offices in the UK.
Furthermore, we have over 25 years’ of experience advising business and non-profit organisations going through insolvency and offer services including liquidation support, administrations and pre-pack administrations.
Our experienced team is here to support you and your organisation through financially challenging times. To get advice or find out more about our services, contact a member of our team.
FAQs
How long does company administration take?
Company administration is meant to last for no longer than twelve months, but for large companies with more complicated situations, the process can take much longer.
Creditors can extend the administration for up to 12 months, and the Court is able to extend the period of administration indefinitely.
How long the entire process takes will also largely depend on how the administrators see the future of the business. For example, if a sale of the business and assets can be agreed via pre-pack administration, the process can move very quickly.
What is the difference between a CVA and administration?
A CVA is best for companies with temporary cash flow issues that can still trade if debts are restructured. Administration, however, is suited for more severe situations where creditor pressure is high and a business and asset sale is likely.
The key differences are highlighted below:
| CVA | Administration | |
|---|---|---|
| Control | Directors retain control | Administrator takes control |
| Purpose | Debt repayment over time | Rescue, restructure business and asset sale followed by a wind-down |
| Creditor Action | Creditors are bound if CVA is approved | Automatic moratorium on claims |
| Voting Requirement | 75% creditor approval required | No vote is needed for entry |
| Impact on Business | Businesses can continue trading | May disrupt operations |
| Best For | Viable businesses needing debt relief | Severe distress needing protection |
