The Administration Series: A Short History of Administrations

Edwin Coe’s Restructuring & Insolvency team has put together a series of blogs on all matters administration related, covering background and insights into the process, technical guidance, case law updates and practical tips.

Please keep an eye out for our upcoming blogs in this series, and do not hesitate to get in touch with a member of our team should you require assistance in relation to a company facing financial difficulty. We are experts in this field and are here to help.

Administration: A Short History

27 January 1977 is a pivotal date in the history of insolvency law in the UK. It was on this date that the then Secretary of State for Trade and Industry, Mr Edmund Dell, instigated a wide-ranging review of insolvency law and practice in the UK under the chairmanship of Sir Kenneth Cork. And so was established the Insolvency Law Review Committee (the “Cork Committee”).

In seeking to promote a culture of rescue in business, the Cork Committee’s terms of reference included a consideration of “less formal procedures as alternatives to bankruptcy and company winding up proceedings in appropriate circumstances.”

Published over five years later in June 1982, the Cork Committee’s conclusions were recorded in the Cork Report, which proposed two new corporate insolvency procedures:

• Administration: under which a company in trouble could seek an order from the court for the appointment of an external “administrator” to manage the company, whether with a view to rescuing the business, its disposal as a going concern, or disposal of its assets, so as to provide creditors with a better return than would be obtained under liquidation; and
• Company Voluntary Arrangement (“CVA”): whereby a company, whether or not insolvent or facing insolvency, could make an arrangement with its creditors and members for satisfying its debts, on the basis of acceptance by creditors of a proposal made by the directors. The company would be able to continue to trade under the control of the directors and the general supervision of a “supervisor”.

Both schemes were implemented in the Insolvency Act 1985, which was subsequently consolidated in the Insolvency Act 1986 (“IA 1986”) and implemented in detail by the Insolvency Rules 1986.

Administration Orders

Administration was conceived as an essentially temporary measure. A key function of the procedure was to impose a freeze, or “moratorium”, on the enforcement by creditors of their rights. An administration order was granted by a court on the basis of a petition, normally from a company or its directors, and an independent report on the company’s position. Although a secured creditor could seek to disrupt an administration order being made by appointing an administrative receiver, once an order was made a moratorium was introduced such that any administrative receiver would be required to vacate office and neither secured nor unsecured creditors could enforce their debts. The practical effect of the moratorium was to ensure that the prospects of selling the company or its business as a going concern, or to undergo a reorganisation, would not be undermined by the actions of a single creditor. An equivalent moratorium was not, at this stage, available for companies entering into a CVA.

The administration procedure required that it would lead to one of four possible outcomes, specified in the administration order, though there was no hierarchy or priority applied to these objectives. The outcomes included the survival of the company or a part of it as a going concern; the approval of a CVA; the sanctioning of a scheme of arrangement; or to produce a better outcome than might be attained in a liquidation.

Underuse of the Administration Procedure

Notwithstanding the continuation of the fundamental principles of the administration framework, as recommended by the Cork Report and enacted by the IA 1986, there was a perception that the system was still not sufficiently promoting corporate rescue and that the uptake of the administration and CVA procedures remained low. As a result, substantial reforms to corporate insolvency procedures were made at the turn of the millennium by the Insolvency Act 2000 and the Enterprise Act 2002, both of which took effect over the course of 2003-2004.

Enterprise Act 2002

The Enterprise Act 2002 (“EA 2002”) created a new section 8 of the IA 1986, which applied Schedule B1, also of the IA 1986. Schedule B1 contains the new administration procedure and the powers of administrators. The same provision of the EA 2002 also repealed the entirety of Part II of the IA 1986 (the old administration provisions). Part II is however still preserved for special administration regimes pertaining to water and sewage companies, railway companies, air traffic service companies, public-private partnership companies, and building societies, among others.

According to Ms Patricia Hewitt, Secretary of State for Trade and Industry for the period 8 June 2001 to 6 May 2005, the corporate insolvency provisions of the EA 2002 were intended to “facilitate company rescue and to produce better returns for creditors as a whole”. It achieved this through three principal changes:

1. Administrative receivership was abolished (for debentures created after 15 September 2003) on the basis that the procedure gave an unhealthy amount of power to creditors holding floating charges, who because of their secured status lacked the motivation to rescue failing companies;
2. The second main development went to the administration procedure and the desire to capture the benefits of speed and flexibility associated with the receivership mechanism, whilst maintaining sufficient accountability. Accordingly, the out-of-court appointment process by the company, its directors or the holders of floating charges was established. Once appointed, and pursuant to paragraph 3 of Schedule B1 of IA 1986, the administrator must then act in accordance with a statutory hierarchy of objectives (the first of which expressly provides that rescue is the primary and most desirable outcome of the procedure) and must justify their course of action; and
3. Finally, the EA 2002 abolished the Crown’s preferential status in insolvency proceedings and, instead, a proportion of the floating charge recoveries would be ring fenced for the general body of unsecured creditors – which would be known as the “prescribed part”.

Administration in the Post-EA 2002 Era

Whereas, prior to the EA 2002, an administrator could only be appointed by an order of the court on an application by the company, its directors or its creditors, there is now the additional route for a company to enter administration by the out-of-court appointment process of either the company, its directors or the holder of a qualifying floating charge.

For administration applications, the court must be satisfied that it is reasonably likely that the statutory purposes will be achieved; whereas when an out-of-court appointment is made, it will suffice that the proposed administrator is willing to declare that they think there is a reasonable likelihood of achieving the new statutory purposes.

Return of the Crown Preference: The Finance Act 2020

Following the abolishment of the Crown Preference in the UK by the EA 2002, which took effect in 2003, HMRC ranked as an unsecured creditor in respect of all taxes owed to it on any basis (unless, of course, it had taken security, which was unlikely).

In October 2018, it was announced in the budget that certain taxes would be moved back up the insolvency hierarchy to rank as secondary preferential debts – the effect of which is that, in the statutory waterfall, these debts rank after employees’ preferential claims but before the claims of floating charge holders. The Finance Act 2020 codified these changes, which took effect from 1 December 2020.

The practical effect of these changes is that certain types of tax which a company has collected on behalf of others (for example, VAT, PAYE, NICs, construction industry scheme deductions and student loan repayments) rank significantly higher in the waterfall – and so it was claimed, the changes would help to protect public funds and ensure that more tax actually reaches Government.

Uptake of the Reformed Administration Procedure

The Government’s efforts in reforming and improving corporate insolvency law have largely been successful, as evidenced by the significant increase in companies entering administration since 2003: in 2023 there were 1,567 administrations recorded, which is more than double the amount in 2003. It should however be noted that the heyday of the administration procedure was during the financial crisis, in 2008, when there were 4,822 recorded administrations.

We envisage that directors, creditors and qualified floating charge holders will continue to utilise the now tried, tested and reformed administration procedure to promote the rescue of companies facing financial difficulty. Reform will no doubt continue to play a significant part in insolvency law in the coming years, and specifically the administration procedure, to ensure that viable companies are saved and, with them, so too is employment, trading and the generation of profit. And if rescue becomes unattainable and financial failure is unavoidable, at least with the establishment of a regulated insolvency industry (also a result of the Cork Committee’s review), we can rest assured that distressed companies will be dealt with fairly and transparently.

Our Restructuring and Insolvency team has considerable experience in advising businesses, directors and individuals facing financial distress. Should you require any assistance, please contact any member of the Restructuring & Insolvency team. We are experts in this field and are here to help.

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