The statutory purposes

The Administration has to be capable of satisfying one of the following ‘statutory purposes’:

1. Rescuing the company as a going concern – this could be by putting in place a CVA;
2. Achieving a better result for the company’s creditors as a whole than if the company had gone into liquidation;
3. Realising assets to enable preferential or secured creditors to be paid.

The law requires that these purposes be pursued in the order of priority set out above.  That is to say the Administrator must first consider whether he can save the business within the existing company.  The second purpose reflects the difference in business and asset valuations and liabilities on ongoing and closed down scenarios – typically formal insolvency procedures both depress asset values and increase debt levels.  Only if the second statutory purpose also proves unachievable can the administrator look at option 3, a ‘fire sale’ of the assets aimed at putting money into the hands of those entitled.

Setting the purpose of the administration is not just of academic interest, it dictates administration strategy and the outcome for you.  As you as directors have no real control over the administration once it’s started, it’s essential that you explore each purpose with the proposed Administrator in detail beforehand.  Honest and open dialogue is essential.