What Is Special Administration? Our Comprehensive Guide
When trying to tackle major debts, a company may opt to go into administration in order to manage the journey out of insolvency.
It’s a tried and tested debt solution, falling under the Insolvency Act 1986, during which creditors cannot take legal action against the company.
In this blog, we look at a less common type of administration: special administration.
Applicable in certain cases and sectors, we answer the question “what is special administration?” and provide background to this area of insolvency.
Read on for our guide to special administration.
What is special administration?
Like ordinary administration, the process involves the relinquishing of control to administrators who will seek to turn a company’s situation around if possible – or to wind it up in the most efficient manner.
However, a special administration also requires client assets to be recovered as soon as feasibly possible.
It also necessitates engagement with market regulators; these might be the Financial Conduct Authority or Bank of England should the special administration be applied to a financial firm, or Ofgem in the energy sector.
We’ll touch on both these sectors below.
Crucially, special administration is a court ordered action as opposed to being decided upon collaboratively by company directors and insolvency practitioners.
Why would a special administration be applied? This answer is sector specific.
In the energy sector, the recent case of energy-firm Bulb being placed into special administration reflected not only the scale of the organisation in terms of its multi-million-person customer base, but the national necessity of the energy it supplies.
When it comes to the financial sector, and investment banks, the development of special administration came as a consequence of the collapse of Lehman brothers.
Going unchecked, without a special administration applied, the economic impact of the collapse of an investment bank could be even more damaging to the wider economy – thus necessitating the court-ordered process.
Investment banks
As touched on above, the 2008 financial crash precipitated an urgent debate on how to manage such situations.
This led to legislation – the Investment Bank Special Administration Regulations 2011, as an add-on to existing powers detailed in the Banking Act 2009.
In the decade since, updates have been made to the regulations surrounding the special administration of investment banks, notably the Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017.
These amendments serve to make the special administration process more efficient, allowing the administrator to transfer client assets more simply.
Additionally, the updates require the administrator to work more closely with the Financial Services Compensation Scheme (FSCS) as well as ensure the continued security of client assets in spite of the investment bank’s circumstances.
The energy sector
The current energy crisis has received significant media attention in recent months and has shed further light on the important role energy companies play – as well as the issues that can occur should they collapse.
In the past 18 months, 31 energy companies have ceased trading. Most interesting to us, however, is the case of Bulb, who were placed into special administration.
Being the largest company to fall into financial peril last autumn, Bulb’s plight had potential major repercussions for its customer base and the sector as a whole.
By placing it in the hands of administrators, under the special administration rules, the intention is that not only will customers experience the most minimal level of disruption, but Bulb’s obligations to creditors can be managed.
The steps of special administration
Special administration is no small thing. Indeed, it can involve the highest levels of Government.
As such, the process of entering special administration is detailed.
Administrators will prepare plans within ten weeks of the special administration order, and consultation with creditors, clients and the FCA will take place.
In the case of investment banks, the return of client assets is a priority.
However, depending on the circumstances, this is unlikely to be done so with immediacy, instead only once administrators are satisfied all claims have been accounted for.
The special administration can be concluded following a successful court application.
Note: it could also be suspended should a company voluntary arrangement be implemented.
As for the case of Bulb, and special administration in the energy sector, we are seeing a new precedent.
How the process unfolds – and indeed, ends – is yet to be seen.
Our guide to special administration
In terms of its legislation, special administration is a relatively new insolvency management route – and not without certain complexities.
While your business may not be facing special administration, should you be concerned about company debt, rest assured the team at Hudson Weir are excellently placed to provide advice.
