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As a business owner, you are likely, at times to be owed money by other businesses. Usually, the other company will pay you the owed money within the agreed timeframe of your credit agreement, and you will not need to consider legal action. However, a company can experience financial difficulties and become involved in a formal insolvency proceeding managed by an administrator for the company’s debts. This is business administration in England. If the administration process affects a business that owes you money as one of its creditors, you need to understand how this administration affects you.
This article will explain the administration process for you as a director or shareholder of a limited company in a small to medium-sized trading business owed money. It will explain, for example, that the company assets of the business, such as the company’s property, can be sold off to pay its debts. The article also explains the position of the company’s creditors, which includes secured creditors and unsecured creditors.
Purpose and Outcome of Administration
Business administration in England is one of a few formal insolvency proceedings that you, as a creditor owed money, may become involved in.
The stakeholders that can apply to the court to issue an administrative order are:
- the company’s shareholders on behalf of the company, provided the shareholders pass a resolution;
- the company’s directors through a board resolution;
- any creditor such as a preferential creditors; and
- certain other insolvency officials such as a liquidator.
An administrator is appointed by the court when a company is in business administration in England. They will first try to rescue the company’s business. However, if there is no reasonable chance of saving the business, they can wind the business up. Winding up a business is where a company’s assets are sold off, and the proceeds pay off the creditors according to their legal rights. Alternatively, the administrator may conclude that they can rescue the business but that a rescue would put the creditors in a worse position than a wind-up. In this case, the administrator can proceed with a wind-up.
Where you receive less money than the business owes you following the sale of the business, this is because the administrator determined this was the fairest option. You would have received less money than if the company was wound up.
Rights of a Trade Creditor in an Administration
The administrator must act on behalf of all the creditors according to their legal interests in the company when a company is in business administration in England. Companies in administration often owe money to more than one creditor. For instance, the company may owe you money, as well as its bank. The administrator must treat all creditors fairly, although not all creditors have the same rights. For instance, as a trade creditor, your interests likely differ from a financial creditor such as a bank.
As is often the case, after a wind up, there may not be enough money to pay back the creditors in full. In this case, you and the other creditors will only get back a portion of your money. This portion will be equal to your share of the total debt of your class of creditors.
For instance, suppose a company owes you £100,000 and £200,000 to three other creditors. The total debt owed to your class is £300,000, and your debt is 30% of this. If, after all other creditors with a higher priority are repaid, there is only £30,000 left, you will only get £10,000 back.
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Order of Priority and Class Composition
The law determines classes of creditors by looking at their rights and interests in the business. There are two classes of creditors:
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Secured creditors |
These are usually banks that have given the company a loan secured on the company’s assets. Usually, the security package will be over all of the company’s assets, and only a single creditor will own this security interest. |
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Unsecured creditors | These include all other financial and trade creditors who loan money without receiving any security. |
Secured creditors always get paid back first as they have first priority on the company’s assets. If the company is wound-up, all assets are sold, and all proceeds go first to the secured creditors. If there is anything left, it goes to the unsecured creditors.
Moratorium
One of the most significant effects of administration on your rights as a creditor is that you lose the ability to claim against the company individually. Once the court orders the company into administration, you cannot try and sue the company to recover your money. This is called a moratorium and lasts for the duration of the process.
The purpose of the moratorium is to:
- give the administrator time to order the company’s affairs;
- not burden the court with numerous related claims that it would otherwise have to manage individually; and
- encourage all creditors to work together.
While you are not obligated to participate in the administration, it is almost always in your interest.
Challenging the Administrator
You can only challenge the administrator if you believe:
- you suffered unfair harm, such as if the administrator did not recognise your rights as a creditor of a particular class;
- the administrator has acted inefficiently, such as by selling off assets far below market value; or
- the administrator has acted incorrectly.
Further, you must apply to the court to challenge the administrator. The court may then remove the administrator if it is satisfied with the claim. It may even order the administrator to pay damages, though this rarely happens in practice.
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Key Takeaways
As a trade creditor to an insolvent company in administration, the administrator acts on behalf of all creditors, including you. They will first try and rescue the business where there is a good chance it will work, and creditors like you will not be worse off than if the company is wound up. If the administrator cannot rescue the company or thinks the creditors will be better served following a wind up, they will sell off the company’s assets. The next step is distributing the sale proceeds to pay back you and other creditors the money due to them according to their rights as creditors. Secured creditors always get paid first, followed by unsecured creditors. As a trade creditor, you are likely to be an unsecured creditor.
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Frequently Asked Questions
Administration is a kind of insolvency process. A court appoints or approves an administrator who handles the process. The administrator’s overriding goal is to ensure creditors get as much money back as possible through a rescue or wind-up.
The administrator acts in the interests of all the creditors according to their legal rights against the company.
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