In my previous article, I examined the ability of secured creditors to enforce their rights through the appointment of a receiver, briefly touched on administrative receivers and administrators, and made reference to the types of security interests available to lenders.
This article addresses a different but related question: can an administrator be appointed when a receiver is already in office, and, if so, what is the impact on the receiver on appointment of the administrator?
The short answer is yes, in both the DIFC and ADGM, an administrator may be appointed notwithstanding the pre-existing appointment of a receiver. However, the entities eligible to initiate such an appointment differ between the two financial free zones. In DIFC upon the appointment of the administrator, any application for winding-up shall be dismissed, and any administrative receiver shall vacate office. While the administrator can be appointed despite the existence of an administrative receiver, the two officeholders cannot co-exist.
Whereas in the ADGM, if an administrative receiver is already in office, the court must dismiss any pending administration application(s), limited exceptions apply (for example, the receiver consents), and out-of-court appointments are likewise restricted while an administrative receiver is in office. By contrast, a receiver of part of the company’s property may remain unless and until the administrator requires them to vacate.
ADGM
The ADGM Insolvency Regulations 2022 establish a comprehensive administration regime that is closely aligned with the UK model. Administration is designed as a collective insolvency process, with the primary objectives of:
- Rescuing the company as a going concern;
- Achieving a better result for creditors than in a liquidation; or
- Realising property to make distributions to secured or preferential creditors when rescue is not feasible.
A person may be appointed as administrator of a Company:
- By an order of the court
- By the holder of a qualifying charge
- By the company or its directors
Key features of Administration:
- Moratorium: An administration order sets a statutory moratorium, which, amongst others, prevents creditors from enforcing security or starting legal proceedings without consent.
- Displacement of receivership: A receiver appointed prior to administration may continue in office until the administrator is appointed, at which point the administrator assumes overriding control of the company’s affairs.
- Secured creditor rights and floating charge holders: Holders of qualifying charges, over all or substantially the whole of a company’s assets, have significant statutory rights under the ADGM Insolvency Regulations 2022. They can appoint an administrator “out-of-court” by filing a notice of appointment with the court and maintain influence throughout the administration process, including receiving notices of key developments, approving extensions, and participating in restructuring proposals.
DIFC
The DIFC Insolvency Law 2019 (DIFC Law No. 1 of 2019) (“DIFC Law”) introduced a court-supervised Rehabilitation regime, which provides distressed companies with the opportunity to restructure under creditor oversight and is designed to facilitate corporate recovery while allowing the company to continue operating. A company is eligible to apply for a Rehabilitation Plan where it is or is likely to become unable to pay its debts and there is a reasonable likelihood of a successful Rehabilitation Plan being reached between the Company and its creditors and shareholders, this may involve a compromise with creditors or other restructuring measures and is overseen by a Rehabilitation Nominee.
The regime includes an automatic moratorium upon filing, which prevents creditor actions during the moratorium period in accordance with the DIFC Insolvency Regulations and offers the company time to restructure or rehabilitate under the Rehabilitation Nominee’s oversight.
Notwithstanding the appointment of the Rehabilitation Nominee, the directors of the company are authorized to continue managing the Company’s affairs, except where there is evidence that the company, its managers or directors are guilty of fraud, dishonesty, incompetence or mismanagement or other offences as set out in the DIFC Law.
Any creditor who holds security over all or substantially all of the property and undertaking of the company and is entitled to appoint an administrative receiver shall be entitled to object to the appointment of an administrator.
The court may appoint an administrator if, inter alia, it considers that the company is or is likely to become unable to pay its debts and the appointment of an administrator would be likely to achieve the approval of a Rehabilitation Plan, a Voluntary Arrangement or a scheme of arrangement under the Companies Law.
Key Features of Administration:
- Moratorium: Upon appointment, a statutory moratorium is imposed, preventing creditors from enforcing security or initiating legal proceedings or appointing a receiver without court consent.
- Control and custody: The administrator may do such things as may be necessary for the management of the affairs, business and property of the company including the removal and replacement of directors.
Comparative Position
Receivership is a creditor-driven enforcement process focused on realising secured assets for the appointing creditor’s benefit. In contrast, administration is a collective process focused on preserving value for the general body of creditors. Administrators act independently and owe duties to all creditors, not just the appointing party.
In ADGM a qualifying floating charge holder over the whole or substantially the whole of a company’s assets can appoint an administrator without redress to the court. They are also entitled to receive notice of key steps in the administration and may have a say in extensions or restructuring proposals, giving them considerable influence over the direction and outcome of the proceedings.
Chris is a Chartered Accountant, member of the ICAEW and on the list of approved Insolvency Practitioners of the DIFC and ADGM. He is also a UK, Cyprus and Romania licensed Insolvency Practitioner.
