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What are the "purposes" of an administration?

The Enterprise Act 2002 indicates that an administration can only take place if there is one of three possible "purposes".

Those purposes are set out at clause 3 to schedule B1 of the Enterprise Act 2002. Those provisions came into force and apply to all administrations after 15th September 2003.

The three purposes are :

1. Rescuing the company as a going concern. (Note: the purpose is to rescue the company as opposed to rescuing the business undertaken by the company.)
2. Or, achieving a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being in administration).
3. Or, realising property to make a distribution to one or or more secured or preferential creditors.

The "purposes" can be seen to be widely drafted. It is anticipated that many more administrations than liquidations will arise as a consequence of the Enterprise Act coming into force.

Two things ought to be noted:

• While the third "purpose" refers to preferential creditors it should be remembered that from 15th September 2003 VAT and PAYE liabilities are no longer preferential. From that date the main class of preferential creditor that will be seen is that related to employees arrears of wages.

• The third "purpose" says nothing about an administrator having the power to pay unsecured creditors. Clause 65(3) to the act allows an administrator to pay a dividend to unsecured creditors if, and ony if, the court first gives permission. The court may be likely to give such permission if it were to result in a higher dividend to creditors (as a result of reduced costs).

It follows that a liquidation may not always follow an administration process.