THE ENTERPRISE ACT 2002 -
THE NEW ADMINISTRATION PROCEDURE

The Enterprise Act ("the Act") continues the current procedure under section 8 of the Insolvency Act 1986 to appoint administrators by court order (although this is now contained in Schedule B1 of the Act), allowing those currently entitled to use this method to continue doing so. In addition, the Act introduces for the benefit of floating charge holders (and in more limited circumstances companies and company directors) a new method of application directly to an administrator which does not rely on a Court application. This is intended to streamline the process of administration, making it easier to use, enabling administration to take into account the interests of all creditors including small firms.

1 Appointment by the Court
The Court can make an administration order only if it is satisfied that the company is, or is likely to become unable to pay its debts, and that the administration order is likely to achieve the statutory purpose of the administration. An application to the Court for an administration order can be made only by the company, its directors, one or more creditors, or the holder of a floating charge.

Once the application has been made, the applicant has a duty to notify anyone who has or who is entitled to appoint an administrator or an administrative receiver.

Once the application to the Court has been made, the Court can either make or dismiss the order sought, make an interim order, treat the application as a winding up petition, or make any other order it may choose. Once made, the application cannot be withdrawn without the Court's permission.

2 Appointment of Administrator directly by the Holder of a Floating Charge
This is the part in which the Act is attempting to streamline the process of administration, making it more straightforward and therefore more widely used. The holder of a 'qualifying floating charge' may apply directly to an administrator. A floating charge will 'qualify' if the security agreement contains a statement to this effect, or purports to enable the holder of the floating charge to appoint an administrator or administrative receiver. A requirement which has filtered through from the Insolvency Act 1986 is that the floating charge must relate to the whole or substantially the whole of the company's property, or do so when taken together with other charges or security. The floating charge holder does not need to demonstrate that the company is or is likely to become unable to pay its debts.

The preconditions to appointing an administrator without a court order are;

1. the floating charge holder has given at least two business days written notice to any holders of qualifying floating charges with priority over the applicant's (i.e. in that they were created before or take precedence by way of an agreement), and
2 the relevant floating charge is enforceable (i.e. the holder is entitled to call in the security), and
3 the company is neither in liquidation nor has a provisional liquidator been appointed, and
4 neither an administrator nor an administrative receiver is already in office.

Notice of Appointment
The floating charge holder then files a Notice of Appointment with the Court. This must include a statutory declaration that the applicant holds a qualifying floating charge, that the charge is enforceable, and that the appointment is in accordance with Paragraph 16 of Schedule B1 of the Act. An offence is committed by the applicant if in the declaration he makes a false statement, or one which he does not reasonably believe to be true. The Notice of Appointment should identify the administrator, contain a statement that he consents to the appointment, and a statement that the purpose of the administration is likely to be achieved.

If a winding up order has been made, a qualifying floating charge holder cannot appoint without a Court Order, but can, unlike the company itself or its directors, apply for administration through the court. If this application is successful, the winding up order will be discharged.

3. Appointment of the Administrator by Company or Directors
The restrictions on the power to appoint by the company itself or its directors without a Court Order are:

1 (unlike the application by the floating charge holder), the company or its directors do have to show that the company is, or is likely to become unable to pay its debts;
2 the company has not been in administration, or subject to a moratorium in respect of a failed CVA in the previous twelve months;
3 a winding up petition has not been presented to the court;
4 the company is not in liquidation; and
5 no administrator or administrative receiver has been appointed.

Notice of Intention to Appoint.
Where a company or the directors of a company propose to make an appointment of an administrator, at least five business days written notice must be given to anyone who is entitled or has appointed an administrator or administrative receiver. Notice must be given in the prescribed form, identifying the administrator.

Notice of Intention to appoint must be filed with the Court accompanied by a statutory declaration that the company is or is likely to become unable to pay its debts, that the company is not in liquidation and other such additional information as prescribed. Once again, an offence is committed if the information provided in the statutory declaration is false.

Filing the Notice of Intention creates an interim moratorium. During the period of five business days, a floating charge holder may either agree with the appointment or appoint his own administrator - the floating chargeholder has an effective right of veto in this regard. The directors of the company are encouraged to stay in control during the interim moratorium, which encourages the rescue of the company.

If the floating charge holder agrees with the appointment, or does not reply, then Notice of Appointment must be filed with the Court within ten days of filing the Notice of Intention to Appoint. If this deadline is not respected, the interim moratorium ceases and the administrator cannot be appointed.

Notice of Appointment
Where a company or the directors of a company appoint an administrator, Notice of Appointment must be filed with the Court. The Notice of Appointment must be in the prescribed form and contain a statutory declaration by or on behalf of the person who makes the appointment that the person appointing is entitled to appoint, the appointment is in accordance with Schedule 16 of the Act and the statements made and information given remain accurate. The Notice must identify the administrator and state that in his opinion the purpose of the administration will be achieved. It is an offence to knowingly make a false statement in a statutory declaration.

4 Outline of the Procedure following Appointment
(a) As soon as is reasonably practicable after appointment, the administrator shall;

(i) send notice of his appointment to the company,
(ii) publish notice of his appointment in the prescribed manner,
(iii) obtain a list of creditors,
(iv) send notice of appointment to each creditor of whose claim and address he is aware.

(b) The administrator must send notice of his appointment to the registrar of companies within seven days of the administration order (if appointed by order).

(c) As soon as reasonably practicable after the appointment of the administrator, the company shall provide a statement of affairs to the administrator (the person required to do this shall do so within ten days of the date he receives notice of this requirement).

(d) The administrator shall within twenty-eight days of the company entering administration send a copy of his proposals to the registrar, creditors and members (of whose claim and address he is aware). In case of creditors, this must include the date of the creditors meeting which must be within six weeks of the date that the company entered into administration.

(e) The appointment of the administrator ends automatically after twelve months. The administrator can apply to the Court for a specified extension (which is not capped), or a six month extension can be agreed by consent.

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