The three Statutory Purposes of an Insolvency Administration - Source of the Insolvency Law
What is the purpose of an insolvency Administration?
Schedule B1 of The Insolvency Act 1986 provides that an insolvency Administration of a limited company can only take place if there exists one of three possible "statutory purposes" or three possible outcomes of the Administration.
Those three statutory purposes are set out at Paragraph 3 to schedule B1 of The Insolvency Act 1986. Those provisions came into force and apply to all Administrations after 15th September 2003.
The three Administration statutory purposes (or required outcomes) are:
- Rescuing the company as a going concern. (Note: this purpose is to rescue the company as opposed to rescuing the business undertaken by the company.)
- 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).
- Or, realising property to make a distribution to one or or more secured or preferential creditors.
The three "statutory purposes" of an insolvency Administration can be seen to be widely drafted. 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 occur is that related to employees arrears of wages and unpaid holiday pay.
- The third "purpose" says nothing about an administrator having the power to pay unsecured creditors. Clause 65(3) to The Insolvency Act 1986 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
As the three statutory purposes of an Insolvency Administration are widely drafted it is probable that your company could be placed into Administration if it were facing financial difficulty and it needed a breathing space from creditors enforcement actions so as to provide time to restructure the debt burden.