Court of Session provides guidance on when a business can exit administration as a going concern

The Scottish court had been asked to rule on whether the administrators of Station Properties Ltd had fulfilled the objectives of the administration, and would therefore be able to return the business to its directors to trade as normal.

In an application for directions by the Administrators, Lord Hodge has directed that, due to an ongoing claim by one of the company's creditors, construction firm, Dunedin, and due to the size of Dunedin's claim not yet being finalised, it could not yet be established whether Station Properties was now able to remain in business and pay its debts as they fell due and therefore exit from administration as a going concern. He said that a company could be treated as a going concern and returned from administration to the control of its directors if it was "probable that the company will be able to pay its debts as they fall due" for the "foreseeable future". Although this was generally defined as a minimum of 12 months for the purposes of accountancy practice, the "precise period" would "vary depending on the circumstances of the particular company".

Administration is the most common route by which a larger business enters the insolvency process. Administrators, once appointed, take control of the insolvent company's assets in order to extract the best possible value for the benefit of the creditors. An administrator can be appointed by the company, its directors or by a creditor that holds a floating charge against the company without petitioning the court. Other creditors can petition the court to appoint an administrator.

The Insolvency Act, which is the piece of law that governs the administration regime, allows administrators to bring the administration to an end once its purpose has been achieved. This power, which is set out in Para 80 of Schedule B1 to the Act, applies only where the administrator has been appointed by the directors, as this case, or by the holder of a qualifying floating charge. To exercise this power, the administrators must file a notice with the court and inform the company's creditors.

Litigation expert Vivien Welsh of Pinsent Masons, the law firm behind Out-Law.com, said that Lord Hodge's opinion would provide useful guidance to all administrators.

"The relevant section of the Insolvency Act can be used where the administrators think that the purpose of the administration has been sufficiently achieved," she said. "This is a matter for the administrators without requiring to apply for Court sanction, and so there was no existing Court authority on what it might mean in the context of returning a company to its directors as a 'going concern'," she said.

"This new guidance focuses on the individual cashflow solvency of each company. There can be no precise formulation of a 'going concern' simply because it will vary in each case. In effect, administrators must be confident that the business plan and cashflow forecasts have been examined for an appropriate period – which will not be 12 months in every case – and that they are realistic," she said.