What are the Advantages and Disadvantages of Administration?
For a company in financial difficulty, going into administration represents a great opportunity to turn things around while protected from certain legal actions.
If you’re facing threats of winding up or harassment by angry creditors, the administration is designed to offer a space where the future of the company can be assessed, and the right conditions put in place for its turnaround.
There are advantages and disadvantages to entering into administration, however, which this article will further explore.
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Advantages of Going into Administration
The advantages of entering administration can be substantial, providing it’s the right fit for your circumstances.
The Best Deal for Creditors
When assessing the right course of action, an insolvency practitioner will always seek the maximum return for company creditors.
If an administration is chosen, then he/she will have concluded that administration offers the possibility of greater financial return than liquidating the company.
Ring Fence Against Legal Actions
For insolvent companies, one of the greatest stresses can be aggressive legal action from creditors. These can include County Court judgement letters, Winding up Petitions, and various other threatening letters.
However, when a company is placed into administration, a moratorium is placed on all legal action.
As well as providing a tremendous relief for worried directors, this can allow the company time to regroup, and assist the best course of action so that it can continue trading.
For directors this can feel like one of the most attractive advantages of the administration process.
Allows for Company Restructuring
Administrators are usually experienced practitioners who can offer real insight into turning a business around. Since one of the primary objectives of administration is to rescue the business as a going concern, the broad reaching powers of the administrator given the possibility to leave a company in a vastly improved position.
So the process offers the advantage of buying time, unimpeded by the threat of imminent winding up.
The Company Survives
For companies in administration, options are usually fairly few and far between. Administration offers the possibility for a company to survive and continue trading as opposed to the finality of being wound up.
Disadvantages of Going into Administration
Entering into administration is not for every company. The choice must be made carefully, factoring in the following disadvantages.
High Cost
Administration is rarely if ever a quick process. Some cases go on for many months and, in some instances, more than a year. One of the costs of this activity, including the sometimes significant fees paid to the administrator, can cost your company a lot of money. Although these fees are usually deducted from what would have been paid creditors, meaning that the directors themselves would not incur a direct cost, it can end up being more expensive procedure than either a pre-pack or a voluntary liquidation.
Company administrations also involve legal fees, which are a significant cost in their right.
Loss of Control
in administration, the power of the direct running of the limited company seeds from the directors to an administrator. This administrator will have tremendous powers at his/her disposal, including disposing of company assets, corporate restructuring, and even to put the company liquidation if it is felt that this will provide a better return for creditors.
Trading may be Impacted by Negative Publicity
Since any company going into administration will be advertised in the London Gazette, and possibly other media, the announcement may have implications regarding the company’s ability to continue trading with current suppliers. The company’s reputation may also suffer if customers lose confidence.
Investigation into the Conduct of Company Officers
Once a company has entered administration, tremendous scrutiny will be placed upon company affairs, including actions taken during the previous three years of trading.
Unsure? Speak with an expert about how the advantages and disadvantages of entering administration will affect your particular situation.
If you would like to talk to someone about administration and whether it’s suitable for your company, call us on 0800 074 6757 or use the live chat function below.
