Regularly the news media reports that a fashion business is in difficulty or is about to, or has gone into, administration. But what is the purpose of administration? What does an Administrator do? Most importantly how should suppliers deal with an Administrator? And what does administration mean for a company’s creditors?
Purpose
A company that is under threat of insolvency can initiate the process of administration. This enables the company to be rescued or reorganised, or more likely its assets to be sold, under the protection of a statutory moratorium (see below for a full explanation). Most of the time, administration results in a better outcome for a company’s creditors than going insolvent or being wound up.
What does the Administrator actually do?
The Administrator must take custody and control of all of the property to which the company is entitled, and sell or dispose of this property, or otherwise take any steps necessary to realise the assets of the company for its creditors. This includes:
- tangible property such as stock; and
- intangible property such as trade marks and book debts owned by the company.
Once these assets have been realised so far as possible, the Administrator must distribute the cash proceeds of those assets in order of priority to the different categories of creditors of the company (see below).
Notably, an Administrator can ‘look back’ at historic transactions and scrutinise whether or not payments made by the company were ‘above board’ in light of the company’s current financial position. In doing so, the Administrator may identify transactions at an undervalue, preferential payments, extortionate credit transactions and transactions defrauding creditors, and can apply to court for an order to have such transactions set aside.
In exercising powers, the Administrator can be expected to take advantage of the statutory moratorium which applies when a company goes into administration.
Moratorium
When a company is in administration, a full moratorium on insolvency proceedings and other legal processes applies to the company, this is effectively a freeze on a company’s creditors taking action against the company, allowing the Administrator to get on with restoring the company to profitability, without having to deal continuously with the attempts of secured (and often, disgruntled!) competing creditors trying to enforce their rights. The moratorium is sufficiently broad to give the company “breathing space”, so that it has the best possible chance of being rescued, or having its assets realised for the benefit of its creditors as a whole.
The moratorium suspends the following:
- the ability of creditors to commence insolvency proceedings against the company;
- the right of a secured creditor to enforce security over the company’s assets;
- the right of a creditor to repossess assets in the company’s possession (including those subject to ‘retention of title’ claims – see point 5 below); and
- a landlord’s right to forfeit the lease of property in which the company is a tenant.
How should suppliers deal with an Administrator?
As noted above, the Administrator must take custody and control of all of the company’s property. This property must be sold so as to realise as much value from the assets as possible. However, assets which are:
- subject to a valid retention of title – or “ROT” – claim (that is where there is a contract for the supply of goods to the company, which stipulates that title to the goods (the “Supplied Goods”) shall not pass from the supplier to the company until the supplier has been paid in full); or
- property held by the company on trust for a third party,
will not constitute the company’s property for this purpose and cannot be sold to realise cash for distributing to the company’s creditors.
Most ROT clauses will include a right for the supplier to repossess the Supplied Goods in the event of non-payment. However, once a company is under the administration moratorium – including the interim moratorium period immediately following an Administrator’s appointment – no action can be taken to recover the Supplied Goods without the permission of the Administrator or the court, severely limiting the options available to the supplier. Furthermore, in some circumstances, the court may even allow the Administrator to sell or otherwise dispose of assets that are subject to a retention of title clause, if the court thinks it will support the rescue of the company as a going concern.
In determining what property the company owns or is entitled to, the Administrator should make enquiries of the company’s directors to determine whether or not such assets are subject to a ROT clause, as well as looking at any underlying contractual documentation between the company and its suppliers.
- Only where these enquiries do not reveal any ROT clauses, and the Administrator has no reason to suspect that an ROT clause might exist, can the Administrator assume that the goods are the company’s property and can be disposed of as the Administrator sees fit.
- If, having made the enquiries, the Administrator becomes aware of a possible ROT claim, they should not sell the goods before determining whether or not the claim is valid. If the Supplied Goods are subject to a valid ROT claim and are sold, the Administrator could be liable in damages to the supplier.
- Where the Administrator becomes aware of a ROT clause after the Supplied Goods have been sold, then, once totally satisfied that the ROT claim is valid, they should pass the net proceeds from the sale of the Supplied Goods to the supplier, which will be the total amount to which the supplier is entitled in these circumstances.
It is critical that a supplier which believes that they have a valid ROT claim over certain assets of the Company establish their title to the Supplied Goods in order to re-take possession of the goods.
As part of this, the Administrator may:
- require the supplier to complete and return a questionnaire provide further information about the Supplied Goods. It is in the supplier’s best interests to respond to any such questionnaire as quickly as possible;
- seek the views of the company’s directors as to whether the supplier has a valid claim to the Supplied Goods, including confirmation of when the supplier informed the company of the ROT clause, whether the directors accepted the clause and the date the Supplied Goods were received;
- require the supplier to provide conclusive evidence of having provided the Supplied Goods to the company, for example, invoices, delivery notes and transport records.
Unless the Administrator is completely satisfied that the claim is valid, it should not allow the supplier to take possession of the Supplied Goods or to receive any proceeds of their sale. If the Administrator rejects the ROT claim, then the Administrator must ensure that the supplier is recorded as an unsecured creditor of the company.
If the Administrator accepts the ROT claim, the Supplied Goods should be returned to the supplier as quickly as possible, though the supplier is liable to pay any related costs incurred by the Administrator.
What does administration mean for a company’s creditors?
The Administrator owes duties to all of the company’s creditors, not to a single creditor. Furthermore, regardless of who has appointed them, the Administrator is an officer of the court, and acts as an agent for the company. This means that they do not assume personal liability for any contracts they enter into while acting as Administrator, and most contracts they do enter will include wording which specifically excludes any personal liability of the administrators.
When dealing with the “waterfall” of payments out of the company’s assets to its creditors, the category of creditor will impact on when any payment is received from the administration. Broadly, payments from the realised assets of the Company are made in the following order of priority:
- Secured creditors with a fixed charge;
- Expenses of the administration (i.e., paying the Administrator for their own work, and paying any third party costs incurred by the Administrator, e.g. fees of professional advisors such as valuers and lawyers);
- Unsecured creditors whose claims are given a special statutory priority (‘preferential creditors’).
- Secured creditors with a floating charge;
- Unsecured creditors; and
- shareholders
Each category is paid in full before proceeding to the category below. The Administrator may make payments to secured and preferential creditors without receiving the prior permission of the court, but for payments to all other creditors the court’s permission is required.
Administration is rarely easy for companies in Administration and their suppliers but properly drafted ROT clauses which are properly incorporated into contracts with customers will allow suppliers to pursue the recovery of the goods which they have delivered as we shall explore in next month’s issue of Fashion Focus.
