Part 3 – Administrative receivership
October 2013
56.2.21 Introduction – prohibition on appointing an administrative receiver
The Enterprise Act 2002, in an attempt to enable more companies facing financial difficulties to be rescued, amended the Insolvency Act 1986 to stop a holder of a qualifying floating charge (see paragraph 56.2.12 and paragraph 56.2.22) appointing an administrative receiver [Note 1]. There are a number of exceptions to this restriction, see paragraphs 56.2.24 to 56.2.32. The restriction is not retrospective and applies to floating charges created on or after 15 September 2003 [Note 2].
56.2.22 Qualifying floating charge and administrative receiver
A qualifying floating charge is created by an instrument which:
The qualifying floating charge (either itself or together with other fixed and floating charges held by the same person) must relate to the whole, or substantially the whole, of the company’s property [Note 3].
Administrative receiver has the same meaning as that given in Section 251 of the Insolvency Act 1986 [Note 4].
56.2.23 Exceptions: when an administrative receiver can be appointed
The Insolvency Act 1986 provides a number of exceptions which allow the holder of a qualifying floating charge to appoint an administrative receiver. These exceptions (see paragraphs 56.2.24 to 56.2.32) include, amongst others, the financial sector, social housing, public private partnerships and utilities. It is considered unlikely that the official receiver will be appointed liquidator of a company covered by the exceptions.
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56.2.24 Exception 1 – capital market investment
An administrative receiver may be appointed where a floating charge-holder entered into an agreement which is, or is part of, a capital market arrangement if;
A capital market arrangement involves security given by the holder of a capital market investment in for example debentures, debenture stock, bonds and alternative finance investment bonds [Note 6].
56.2.25 Exception 2 – public-private partnership
An administrative receiver may be appointed by a floating charge-holder of a “project company” involved in a public-private partnership with “step-in rights” [Note 7]. A public private partnership project involves resources provided by a public organisation and private persons to assist the public body to carry out one of its functions [Note 8]. A “project company” must be solely connected to the public-partnership project [Note 9]. A company or person who provides finance or an indemnity for a public private partnership project has an entitlement to assume responsibility for completing all or part of the project is said to have “step-in” rights [Note 10]. Salford School Solutions Ltd is an example of a “project company” formed to build and operate two schools on behalf of Salford City Council.
56.2.26 Exception 3 – utilities
An administrative receiver may be appointed by a floating charge-holder of a “project company” involved in a utility project with “step-in rights”. A utility project is a project designed wholly or mainly for the purpose of a “regulated business” [Note 11] which includes, amongst other businesses, the gas, electricity, water industries, railways and some postal service companies [Note 12]. The “project company” must be solely connected to the utility project [Note 13]. A company or person who provides finance or an indemnity for a utility project has an entitlement to assume responsibility for completing all or part of the project is said to have “step-in” rights [Note 14].
56.2.27 Exception 4 – urban regeneration projects
An administrative receiver may be appointed by a floating charge-holder of a “project company” involved in urban regeneration projects with “step-in rights”. An urban regeneration project involves, wholly or partly, the development of land in a designated disadvantaged area outside Northern Ireland [Note 15]. A “project company” must be solely connected to the urban regeneration project [Note 16]. A company or person who provides finance or an indemnity for an urban regeneration project has an entitlement to assume responsibility for completing all or part of the project is said to have “step-in” rights [Note 17].
56.2.28 Exception 5 – project finance
An administrative receiver may be appointed by a floating charge-holder of a “project company” involved in a financed project with “step-in” rights. A “financed project” is one in which the debt, or expected debt, for the project is at least £50 million [Note 18]. A “project company” must be solely connected to the financed project [Note 19]. A company or person who provides finance or an indemnity for a financed project who has an entitlement to assume responsibility for completing all or part of the project is said to have “step-in” rights [Note 20].
56.2.29 Exception 6 – financial market
An administrative receiver may be appointed in respect of a company by virtue of;
56.2.30 Exception 7 – social landlords
An administrative receiver may be appointed of a company that is registered as a social landlord under Part 1 of the Housing Act 1996 or Part 3 of the Housing (Scotland) Act 2001 [Note 22].
56.2.31 Exception 8 – special administration regimes
An administrative receiver may be appointed over the following:
56.2.32 Exceptions – powers of The Secretary of State
The Secretary of State may, by statutory instrument,
56.2.33 Who may appoint an administrative receiver
The holder of a floating charge created before 15 September 2003 or one of exceptions mentioned in paragraphs 56.2.24 to 56.2.31 may appoint an administrative receiver. Where the official receiver has any doubt as to the validity of the appointment of an administrative receiver appointed post 15 September 2003 he/she should seek the advice of Technical Section.
56.2.34 Document appointing an administrative receiver
The document appointing an administrative receiver is generally referred to as an “instrument” in the Insolvency Act 1986. An “instrument” is a deed, will, debenture, floating charge or other formal legal document in writing. For the rest of this part the term “instrument” will generally be used.
56.2.35 Who may be appointed an administrative receiver
An administrative receiver must be qualified to act as an insolvency practitioner in relation to the company [Note 25].
56.2.36 Joint administrative receiver appointments
The instrument appointing an administrative receiver must say whether there can be more than one office holder. Where more than one administrative receiver is appointed the appointment document must say whether decisions about what should be done or authorised by the appointees requires the agreement of all office holders or by one or more of them [Note 26].
56.2.37 Appointment as administrative receiver must be accepted
Where a person is appointed as an administrative receiver under an “instrument” the appointment is not valid unless the person accepts it before the end of the next business day after the day on which he/she receives it, or it is received on his/her behalf. The initial acceptance may be by letter, by telephone, by fax or by e-mail [Note 27]. The administrative receiver must confirm in writing his/her acceptance of appointment within 5 business days unless the original acceptance was in writing [Note 28].
56.2.38 Date the appointment of an administrative receiver is effective
Once an insolvency practitioner accepts his/her appointment as an administrative receiver the appointment is effective from the moment at which the appointment was received by the appointee or by the person acting on his behalf. Where there are two or more joint administrative receivers each appointee must confirm acceptance before the appointment is effective [Note 29].
The person appointing an administrative receiver must file notice of the appointment with the registrar of companies within 7 days [Note 30]. The administrative receiver is required, forthwith, to send notice of his/her appointment to the company and publish notice of it. Within 28 days of his/her appointment he/she must send notice to all the company’s creditors (so far as he/she is aware of their addresses) [Note 31].
56.2.40 Matters to be covered in the notice
The notice sent by the administrative receiver to the company and its creditors must contain the following;
56.2.41 Advertisement of appointment
The administrative receiver must publish his/her appointment in the London Gazette. The notice may also be advertised in such other manner as the administrative receiver thinks fit. The gazette notice and any further advertisement must contain the information contained in the Gazette notice (Form 3.1A) together with the following:
56.2.42 Effect of the appointment
An administrative receiver is appointed to deal with the assets covered by the “instrument” under which he/she was appointed. The assets do not vest in the administrative receiver but he/she takes possession of the assets covered by the “instrument” and deals with them according to his/her powers and responsibilities. The administrative receiver is the agent of the company and his/her principal duty is to realise and manage the assets of the company under his/her control in the interests of the charge-holder. The administrative receiver effectively takes over the management of the company’s business and can cause it to continue to trade prior to selling the business and/or assets.
56.2.43 Directors and the appointment
The appointment of an administrative receiver has no effect upon the position in law of the company officers. Whilst the directors and company secretary have no control of the assets covered by the instrument they remain in office and have all the usual statutory duties to perform [Note 34]. The directors may still have active duties to perform where the instrument does not cover all the company’s assets, or the company holds third party property, for example property held in trust, property held as bailee or property covered by retention of title clauses.
56.2.44 Statutory powers of the administrative receiver
An administrative receiver has the statutory powers listed in Schedule 1 of the Insolvency Act 1986 [Note 35]. The Schedule lists 23 powers which are found in the majority of standard commercial debentures and include the power to sell or otherwise dispose of property, to use the company seal, to carry on the company’s business and to present or defend a petition for the winding up of the company [Note 36]. If the statutory powers conflict with the powers provided in the “instrument” (see paragraph 56.2.45) then the powers in the “instrument” prevail [Note 37].
56.2.45 Powers of the administrative receiver contained in the “instrument”
Most “instruments” will contain clauses outlining the powers of the administrative receiver. The extent of these powers are wholly dependent upon the clauses within the “instrument” and can vary widely. Whilst not possible to provide a full list of all these powers it is common for permission to be given to the administrative receiver to do anything (not specified in the “instrument”) that would enable him/her to carry out his/her duties effectively.
56.2.46 Additional powers of an administrative receiver
An administrative receiver is recognised as an “office-holder” for the purposes of the Insolvency Act 1986 and has the power to request the supply of gas, water, electric and other utilities [Note 38].
56.2.47 Application to court by an administrative receiver
An administrative receiver may apply to the court for any person to be ordered to deliver up property, books, papers or records, to which the company appears entitled, to him/her [Note 39]. The directors, ex-directors, employees and ex-employees have a duty to co-operate with the administrative receiver [Note 40]. If directors, former directors, employees, past or present or any other person with property or information regarding the company fails to co-operate with the administrative receiver an application can be made to the court for a private examination and/or production of documents [Note 41].
56.2.48 What does an administrative receiver do?
An administrative receiver uses the powers contained in the “instrument” (see paragraph 56.2.45) together with his/her statutory powers (see paragraph 56.2.44) to deal with the charged assets. The administrative receiver effectively takes control of the company prior to the sale of the business and/or the disposal of the charged assets. In carrying out these functions the administrative receiver must fulfil a number of duties, see paragraphs 56.2.53 to 56.2.58.
56.2.49 Administrative receiver’s liability under contracts generally
An administrative receiver is an agent of the company (see paragraph 56.2.42) and is personally liable on any contract entered into by him/her in the performance of his/her functions, unless the contract expressly excludes his/her personal liability [Note 42]. If an administrative receiver causes the company to fulfil an existing contract he/she will not have personal liability. Where the administrative receiver decides that a company should not perform an existing contract he/she will not, generally, be personally liable for any breach of contract. The administrative receiver, in properly carrying out his functions, is entitled to an indemnity for any personal liability incurred from out of the company’s assets [Note 43].
56.2.50 Administrative receiver’s liability under contracts of employment
The administrative receiver is personally liable on any “qualifying” contract of employment adopted by him/her. The “qualifying” liabilities were introduced on 15 March 1994 [Note 44] and include wages, holiday pay and contributions to occupational pension schemes incurred after the adoption of the contract [Note 45]. The administrative receiver, in properly carrying out his functions, is entitled to an indemnity for any personal liability incurred from out of the company’s assets [Note 46].
56.2.51 Disposing of property subject to a prior charge
The administrative receiver may apply to the court for permission to dispose of any of the company’s property subject to a prior charge. Where the court is satisfied that the disposal of the secured property is likely it to promote a more advantageous realisation of the company’s assets it may allow the administrative receiver to sell or otherwise dispose of the asset [Note 47]. If the court allows the disposal of the asset the net proceeds are to be paid to discharge the prior security [Note 48].
56.2.52 Administrative receiver’s liability for breach of duty of care
An administrative receiver generally does not owe a duty of care to the company or to subsequent charge-holders. It would appear that the same principles apply as apply to receivers appointed under statutory powers (see Part 4) and the administrative receiver is expected to act in good faith [Note 49]. The court has held in a number of cases that the receiver or debenture holder has been in breach of this duty and in some instances, liable to pay compensation [Note 50].
An administrative receiver shall request the submission of a statement of affairs from one or more of the following;
56.2.54 Statement of affairs – submission and disclosure
The statement of affairs must be verified by a statement of truth (and where applicable) statement of concurrence by the person(s) required to submit it. A copy of the statement of affairs and statement of truth form part of the receivership records [Note 52]. The statement of affairs must be submitted 21 days after the day after the day the administrative receiver issued the notice of the requirement [Note 53]. However the administrative receiver may release a person from the obligation to submit a statement of affairs or extend the period allowed for submission [Note 54]. The administrative receiver is required to file a copy of his/her report (see paragraph 56.2.55), the statement of affairs and any statements of concurrence with the registrar of companies [Note 55]. An administrative receiver may, for the reasons outlined in paragraph 12.17, apply to the court for an order of non-disclosure, or limited disclosure, of the statement of affairs [Note 56].
Within 3 months of his/her appointment, or longer if the court directs, an administrative receiver shall issue a report to the company’s creditors, including unsecured creditors. A copy of the report must be filed with the registrar of companies. The report should describe the events leading up to his/her appointment, the disposal or proposed disposal of the assets of the company, whether the company’s business will be continued, the amounts to be paid to the debenture holder, including interest and the amount, if any, likely to be available to preferential and unsecured creditors (see paragraph 56.2.67) [Note 57]. The report to creditors should be gazetted and may be further advertised as the administrative receiver thinks fit [Note 58].
The administrative receiver is required to call a meeting of unsecured creditors, unless the court orders otherwise, to consider his/her report (see paragraph 56.2.55) with not less than 14 days notice [Note 59]. The meeting may establish a creditor’s committee to assist the administrative receiver to discharge his/her functions [Note 60]. If the company is in, or goes into, liquidation and the administrative receiver provides a copy of his/her report to the liquidator within the time limits a meeting of creditors should not be held. As a result the administrative receiver’s report will not be sent to the unsecured creditors (see paragraph 56.2.55) [Note 61].
The creditors committee must consist of at least three but not more than five members. The committee has the power to ask the administrative receiver to give a report in person and to provide it with information relating to his/her functions [Note 62]. The members of the committee are not paid but do receive reasonable travelling expenses as a cost of the administrative receivership [Note 63]. A creditor who is a member of the committee may deal with the company during the receivership providing he/she acts in good faith and all transactions are for value. The court may on the application of any interested party set aside any such transaction [Note 64].
56.2.58 Disqualification returns
An administrative receiver has a duty to submit a return to the Secretary of State on the conduct of directors and shadow directors [Note 65]. The official receiver may check what type of report has been submitted on ISCIS under the Conduct Assessment tab. Sight of an adverse report may be obtained by the official receiver on a confidential basis from the Intelligence and Enforcement Directorate within IES.
A company may be liable for corporation tax where it makes profits from post administrative receivership trading, interest received and/or chargeable gains from the sale of its assets, for example the sale of freehold property at a profit. The corporation tax remains a liability of the company and is not claimable in the receivership. Where the corporation tax liability was incurred after the date of the winding-up order the tax must be paid out of any available funds as an expense of the liquidation with the priority set out in rule 4.218 of the Insolvency Rules 1986 [Note 66].
On the appointment of an administrative receiver the company’s current and accruing VAT debts are crystallised and will rank as a claim in the administrative receivership. Where the company continues to trade the administrative receiver has 21 days to inform HMRC. The administrative receiver must complete VAT returns and should pay any tax due in respect of supplies made during the period he is acting. Any post receivership VAT credits can not be set-off against any pre-receivership VAT debt.
Creditors may claim VAT bad relief from HMRC on their unpaid debts. Details on claiming VAT bad debt relief are contained in paragraph 78.23.
56.2.62 Duty to file receipts and payments accounts
The administrative receiver is required to file a copy of his/her receipts and payments account with the registrar of companies within 2 months after the end of the 12 month period beginning with his/her appointment and every subsequent 12 months. A final receipts and payments account must be filed within 2 months of him/her ceasing to act. The administrative receiver is also required to send a copy to the company, his/her appointer and members of the creditors’ committee [Note 67].If the administrative receiver defaults in filing the receipts and payments account the court can order that he/she makes such a return within 14 days [Note 68]. In addition he/she may be liable to pay a fine [Note 69].
56.2.63 Administrative receiver’s remuneration
The administrative receiver’s remuneration is primarily a matter for the charge holder and the person appointed. The level of remuneration is usually found in the debenture or floating charge document and is usually fixed by reference to and incorporating section 109 (6) of the Law of Property Act 1925 which limits fees to 5% of the gross amount of money received. This section usually applies even where there is no express mention in the charge document. Where a liquidator is in office, or is appointed, he/she may make an application to the court to fix the amount to be paid if he/she feels it is appropriate to do so [Note 70]. The court has held that remuneration of 4.2% of the value of the assets was reasonable [Note 71]. The official receiver should only make such an application if he/she considers the remuneration excessive and the prior agreement of Technical Section is obtained.
56.2.64 Liquidation and the administrative receiver’s remuneration
Any of the administrative receiver’s expenses and remuneration, incurred as agent for the company, in dealing with assets covered by a floating charge can be properly deducted from the sale proceeds after payment of the costs of realisation. Where the company is put into liquidation an administrative receiver’s remuneration and expenses from realising assets covered by a floating charge should be paid after the settlement of the liquidation expenses [Note 72].
56.2.65 Distribution of monies realised – floating charge
Where the company is not being wound up an administrative receiver appointed under a floating charge must pay preferential creditors before any payments are made to the charge-holder [Note 73]. Preferential creditors will have priority over the holder of a fixed charge if a floating charge crystallised (as per paragraph 56.2.13) into a fixed charge before the date of the appointment of the administrative receiver [Note 74]. The position is a little more complicated where a floating charge, partially or completely, is contractually converted into a fixed charge (see paragraph 56.2.14) where the company does not enter liquidation or receivership and continues to trade. In this instance the charge over the assets should be treated as a fixed charge provided the general conditions in paragraphs 56.2.9 and 56.2.10 apply. The order of priority of payment is:
56.2.66 Interim payments to the charge-holder
An administrative receiver may wish to make payments to the charge-holder as soon as practicable. He/she is allowed to make interim payments. The administrative receiver, in order to avoid any personal liability may arrange an indemnity whereby the charge-holder must repay the whole, or part, of these funds in certain circumstances.
56.2.67 Post 15 September 2003 floating charge – the “prescribed part”, unsecured creditors and the charge-holder
Where an administrative receiver is appointed on a floating charge created after 15 September 2003 (which would only apply to those companies mentioned in paragraphs 56.2.21 to 56.2.32) he/she must make some provision, called the “prescribed part”, for the company’s unsecured creditors. The administrative receiver is required to set aside 50% of the company’s net property up to an amount not exceeding £10,000 and 20% of the net property in excess of that amount to a maximum of £600,000. The company’s net property is the amount that would be available to satisfy the claim of the charge-holder if this section of the Act did not exist [Note 75]. Where the “prescribed part” unsecured creditors are paid in full the surplus may be paid to the charge-holder [Note 76].
56.2.68 Exemptions to the “prescribed part”
An administrative receiver does not have to set any monies aside for unsecured creditors where the company’s net property is less than £10,000 and the costs are disproportionate to the benefits [Note 77]. The administrative receiver may apply to the court for an order that monies are not set aside for unsecured creditors where the costs of making a distribution are greater than the benefits [Note 78]. Additional information may be found in paragraphs 36A.75 to 36A.76 and 36A.86 to 36A.89.
56.2.69 Administrative receiver – vacation of office
An administrative receiver must vacate office if he/she ceases to be qualified to act as an insolvency practitioner in relation to the company [Note 79]. For further information see paragraph 56.2.35.
56.2.70 Removal of an administrative receiver
An administrative receiver can only be removed by an order of the court. The company (known as the principal) is unable to dismiss an administrative receiver. A debenture holder cannot remove an administrative receiver without obtaining a court order [Note 80].
56.2.71 Administration and administrative receivership
Where a company is in administrative receivership any application to appoint an administrator must be made to the court (see of part 2 Chapter 56.1). The court must dismiss the application unless certain conditions are satisfied [Note 81]. In those cases where an administrator is appointed by the court the administrative receiver must vacate his/her office [Note 82]. The administrative receiver on ceasing to act must give notice to the registrar of companies [Note 83].
56.2.72 Resignation of an administrative receiver
An administrative receiver may resign by giving at least 5 business days’ notice to:
56.2.73 Completion of an administrative receivership
An administrative receiver is under a duty to close his/her receivership when he/she has repaid the secured debt of his/her debenture holder. After repaying the debenture holder he/she should hand any surplus assets or monies to the company or, if appropriate, its liquidator. When an administrative receiver vacates office on completing his/her receivership notice must be given to:
56.2.74 Vacation of office and the administrative receiver’s expenses and remuneration
When an administrative receiver vacates his/her office any remuneration, expenses properly incurred, and any indemnity to which he/she is entitled will be charged on and paid out of any of the company’s property which is in his/her custody or under his/her control at the time. This charge is in priority to any security held by the debenture holder that appointed him/her [Note 86].
56.2.75 Dealing with a floating charge after the making of a winding-up order
Where the assets in a company are subject to a floating charge which enables an administrative receiver to be appointed (see paragraph 56.2.21) the official receiver should follow the advice in paragraph 9.92EA.
56.2.76 Appointment of an administrative receiver after the making of a winding-up order
Where an administrative receiver is appointed after the making of a winding-up order the official receiver should ensure that any appointment is valid by following the guidance in paragraphs 9.94EA to 9.100. The official receiver as liquidator should remind the administrative receiver that the costs and expenses of the winding up have to be settled in priority to all other claims including payment to the floating charge-holder [Note 87]. The official receiver should arrange to hand over those assets covered by the floating charge together with any realisations he/she may be holding. From any monies paid over the official receiver should deduct his/her costs, charges and expenses incurred in the winding up.
56.2.77 Where a charge-holder refuses to appoint an administrative receiver
If the charge-holder refuses to take steps to realise their security or appoint an administrative receiver the official receiver should follow the guidance in paragraph 9.93.
56.2.78 Winding-up orders and administrative receivership
Where a winding-up order is made against a company in administrative receivership the official receiver should follow the advice and guidance provided in Part 6.
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