Background

Administration

Administration is a procedure by which a company can be reorganised and its assets realised whilst being protected by a moratorium from actions brought by creditors (explained below).  

Objectives

A company can be put into administration if the objectives of administration are likely to be achieved. These are set out in the Insolvency Act 1986 (the “Act”)4 as:  

  • rescuing the company as a going concern;  
  • achieving a better result for the company’s creditors as a whole than if the company were put into liquidation; and  
  • realising property to make a distribution to one or more secured creditors.  

Commencement of an administration

Briefly, administration can be commenced in two ways:  

(1) Out of court route- Subject to various conditions, an out of court administration route may be taken by the company or its directors and the holder of a qualifying floating charge. For example in practice, banks do not want to be seen pressing companies into an insolvency process, so they encourage the directors to appoint administrators themselves.  

(2) Petition to court- This is the only way that an unsecured creditor can initiate the appointment of an administrator.  

Moratorium

When a company is put into administration, a “moratorium”, i.e., a freeze on creditors taking action against the company, applies. This enables the administrator to proceed with the reorganisation of the company and the realisation of the company’s assets without the threat of proceedings and constant attempts of creditors to enforce their rights.  

The moratorium upholds the pari passu principle. This means that all unsecured creditors in administration or liquidation must share equally any available assets of the company, or any proceeds from the sale of any of those assets, in proportion to the debts due to each creditor.

Moratorium on insolvency proceedings 5  

When a company is in administration:  

  • no resolution may be passed for the winding up of the company; and  
  • subject to certain exceptions, no order may be made for the winding up of the company  

Moratorium on legal proceedings 6

When a company is in administration:

1) No step may be taken to enforce security over the company’s property except–  

(a) with the consent of the administrator, or  

(b) with the permission of the court.  

2) No step may be taken to repossess goods in the company’s possession under a hire-purchase agreement except–

(a) with the consent of the administrator, or  

(b) with the permission of the court.

3) A landlord may not exercise a right of forfeiture by peaceable re-entry in relation to premises let to the company except–

(a) with the consent of the administrator, or

(b) with the permission of the court.

4) No legal process (including legal proceedings, execution, distress and diligence) may be instituted or continued against the company or property of the company except–  

(a) with the consent of the administrator, or  

(b) with the permission of the court.  

Harms Offshore Aht “Taurus” GmbH & Co KG & Anor v Bloom & Ors 7  

As noted above, no legal process may be brought against a company in administration or the property of that company 8.  

The question is whether this applies to assets of the company outside the jurisdiction?  

The above case addressed this question.  

Facts

After Oilexco North Sea Limited (“Oilexco”) went into administration in the UK, Harms Offshore Magnus and Taurus (“H”) commenced a claim against it for pre-administration debts in New York. H obtained attachment orders whereby any sums to or from Oilexco in New York were attached in H’s favour.  

The orders were not immediately served on the administrators in the UK. In ignorance of these orders the administrators made a significant postadministration payment into one of the New York clearing banks, where it was caught by the order H had obtained.  

The administrators subsequently made application in England and in New York. The application in England was for an injunction:  

  • restraining H from taking any steps in the proceedings H had commenced in New York; and  
  • requiring the release of the attachment orders H obtained in New York.  

Decision at first instance in the UK

At first instance the injunction was granted.  

H appealed on the basis that:  

  • the statutory prohibition against creditors bringing proceedings against a company in administration did not have extra-territorial effect; and  
  • the assets of a company in administration, unlike those of a company that is being wound up, were not subject to a trust that justified injunctions against creditors of companies in liquidation.  

Court of Appeal decision in the UK

The Court of Appeal agreed that the prohibition on issuing proceedings pursuant to paragraph 43(6) of Schedule B1 of the Act does not have extra-territorial effect.  

However, the Court also stated that its jurisdiction is not restricted by the territoriality of the statutory prohibition because of the underlying rationale of protecting the assets of the company in administration and the principle of pari passu although the comity owed by the courts of different jurisdictions to each other will normally make it inappropriate to grant injunctive relief affecting procedures in a court of foreign jurisdiction. Whether the court has jurisdiction to prevent a creditor from taking advantage of a foreign attachment thus depends on the specific facts of the case.  

What effect does this case have?

The statutory prohibition preventing proceedings being brought against a company’s assets whilst in administration does not extend to a company’s worldwide assets.

However, an English court can in certain cases grant an injunction to protect the assets of the company in administration and make sure the creditors share equally any available assets of the company (pari passu).  

General tips on how to be best prepared for a company/debtor in financial difficulty

  • Complete regular credit checks of any debtors, suppliers etc;  
  • Keep an open dialogue with suppliers and debtors;  
  • Where possible hold deposits on trust;  
  • Obtain money on account for goods /services where possible; and  
  • Maintain tight credit controls.