Andrew MacCuish and Steven Fennell What do you do if the company you are suing goes into administration? Well, actually, there are quite a few steps you should consider

Many companies struggling with the recession face a real blow when they become caught up in legal disputes, only to find six months into them that their opponent has gone into administration. Legal proceedings are time consuming, expensive and often seen as a waste of resources, so if that happens should you accept that the game is over, cut your losses and get back to running a business?

Not necessarily. For a start, it is important to ascertain why the administration has occurred. It can be difficult to obtain this information to begin with, as the administrator is likely to say as little as possible. But within eight weeks they must send a report to creditors stating the reasons for the insolvency and their proposed course of action. There will then be a creditors’ meeting within a further two weeks, at which creditors can ask questions and vote on the proposals.

The outcome of most administrations will be the sale of the company’s business and assets as a going concern, but claims against the company will stay with it. In the meantime, all proceedings against the company are halted, and new proceedings cannot be commenced without permission. This moratorium covers litigation, arbitration and adjudication. It exists to prevent a “free for all” by creditors and to allow the company’s affairs to be dealt with in an orderly way; it is not there as a bargaining chip for administrators.

The moratorium will not hinder a contractor from simply terminating its employment (or perhaps even the contract itself), either because of an express contractual right allowing it to do so, or because the company in administration does not fulfil its obligations.

Should a contractor wish to bring or continue proceedings against a company in administration, it is necessary to show a valid reason for doing so. If the administrator does not give permission for the proceedings to go ahead, then the contractor may apply to the court for permission. This often ends with the administrator paying for the costs of that application if the court finds that they have acted unreasonably, so it can be worthwhile for the contractor to make the application.

Prompt action may give you the remedy you went to court for in the first place

Administration changes the management of a company: the board resisting your claim is no longer in the driving seat – the administrator is. The response to your claim is one of commercial logic to the administrator; they may listen to the board’s views on the merits of the case, but ultimately they will look at the wider interests of creditors and may well decide that it is not worthwhile devoting resources to resisting you. As administrators are almost always paid from the assets of the company in administration, every pound spent litigating is a pound that could pay their fees, and then the creditors. This situation may give a contractor an opportunity to engage in negotiations with the administrator to reach a sensible outcome.

Even if the contractor thinks it has a good claim, in many cases there is no good reason for the proceedings to continue. However in some cases there may be. First, if the company does have enough assets to allow a distribution to be made to unsecured creditors, the administrator may agree to use litigation to determine the value of the claim. This may be preferable to the administrator assessing or agreeing the value, with the risk of a challenge by a dissatisfied creditor.

Second, if a contractor can obtain judgment in its favour, then that may have important implications in dealings with third parties. There may be a possibility of enforcing rights under the Third Parties (Rights Against Insurers) Act 1930, or establishing a claim under its own or joint names insurance, or against a surety or guarantor of the company. Or even to establish that it is a creditor.

If the claim is brought to establish, for example, the right of access to land or of ownership of plant, then the claim may need to proceed in order to do that. Conversely, the claim may need to continue for the contractor to establish that a right asserted against it is not valid.

When the other side goes into administration partway through legal proceedings, the chances are that it is not good news. However, prompt action to assess available information and the likelihood of success will help to minimise the harm it causes, and may give you the remedy you went to court for in the first place.