Going into Administration

What is Company Administration?

Company administration, sometimes called ‘going into administration’, is a formal insolvency process aimed at rescuing insolvent businesses as a going concern.

When a firm is going into administration, the procedure and the business are managed by an administrator (insolvency practitioner) whose goal is to rescue the company and restore it to profitability.

Despite this, the administrators have a primary duty to the creditors, so their actions will ensure the best possible return for those owed money.

It comes with a moratorium on legal action, a court order designed to offer breathing space. This means that creditors cannot start insolvency proceedings or take legal action against the firm once the administration procedure has been implemented.

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Why Would a Company Go into Administration?

Administration is primarily a recourse for larger companies grappling with significant debts and facing challenges settling their obligations.

It becomes a viable option under the following circumstances:

1. Maximising Creditor Returns: If continuing operations can yield a better return for creditors than immediate closure or liquidation.
2. Potential for Revival: Despite its financial woes, the business has a strong foundation and the potential to regain its profitability with the right interventions.
3. Preserving National Icons: Some entities, like renowned football clubs or other nationally recognized brands, may need a buffer period to restructure. Administration allows them time to recalibrate and negotiate sales.
4. Prioritising Secured or Preferential Creditors: In situations where specific creditors have a secured claim on assets or are given preference, administration can be a route to ensure that properties are realised to meet these obligations.

What is the Process of Company Administration?

So, what exactly happens when a company enters administration?

(1) A licensed insolvency practitioner is appointed as the administrator. Their primary role is to take control of the company, working in the best interest of the creditors. They aim to either rescue the business or ensure creditors get the best possible return.

(2) Once in administration, your company gets protection against any legal actions from creditors. This means they can’t start or continue with lawsuits, or petitions to wind up the company.

(3) The administrator conducts a thorough review of the company’s finances, operations, and assets. They then devise a strategy, which could involve restructuring the business, selling assets, or even identifying a potential buyer for the company.

(4) One of the administrator’s duties is to keep the company’s creditors informed. They will outline the financial state of the company, their plans for the administration, and how they intend to secure funds for the creditors.

(5) Depending on the strategy, the administrator might negotiate with creditors, sell parts (or all) of the business, or even seek new investments.

(6) There are a few ways administration can conclude:

• The company is saved and can continue trading.
• The company is sold as a going concern.
• Assets are sold, and the company is liquidated.
• The administration order is terminated by the court (in rare cases).

What are the Pros and Cons of Administration?

The Role of an Insolvency Practitioner in Company Administration

An insolvency practitioner (IP) plays a pivotal role in the company administration process.

Their expertise and actions can significantly influence the fate of a struggling company.

But what exactly do they do, and why is their role so vital?

1. Appointment as Administrator: When a company enters administration, a licensed insolvency practitioner is appointed as the administrator. This means they effectively take control of the company’s operations.

2. Assessing the Situation: The IP conducts a thorough review of the company’s financial health, evaluating assets, liabilities, cash flows, and operational structures. This assessment forms the foundation for all subsequent decisions.

3. Formulating a Strategy: Based on their assessment, the IP develops a strategy. This could involve:

• Restructuring the company to return to profitability.
• Selling the company as a going concern.
• Liquidating assets to repay creditors.

4. Communication: An essential aspect of the IP’s role is transparent communication. They must keep creditors informed about the company’s financial state, the administration’s progress, and potential outcomes.

5. Execution: The IP doesn’t just design a strategy; they implement it. This could involve negotiating with creditors, making operational changes, or overseeing the sale of company assets.

6. Concluding the Administration: Eventually, the IP will move to conclude the administration. This could result in the company exiting administration and continuing to trade, transitioning to another insolvency procedure, or being wound up.

7. Acting in the Best Interests of Creditors: Throughout the administration process, the IP’s primary duty is to act in the best interests of the company’s creditors, ensuring they receive the best possible outcome.

Why the Role of the IP is Crucial: The expertise of the insolvency practitioner can make the difference between a company’s revival and its dissolution. Their knowledge of the insolvency landscape, combined with their duty to act impartially, ensures that the administration process is navigated with precision, care, and integrity.

For directors, understanding the role of the IP is essential. While it might feel like ceding control, having a skilled IP at the helm can be the best chance for a company to navigate its financial challenges and find a way forward.

Legal Impacts of Company Administration

Here’s a breakdown of the impacts that administration is likely to have legally

1. Moratorium on Legal Actions: Once a company enters administration, it benefits from immediate protection against legal actions from creditors. This means that for the duration of the administration, no legal steps can be taken against the company without the administrator’s consent or the court’s permission.
2. Directors’ Powers: An administrator’s appointment effectively suspends the directors’ powers. The administrator takes control of the company’s operations.
3. Contracts and Agreements: The administrator has the authority to review and, if necessary, terminate contracts and agreements that are not beneficial to the company’s recovery.
4. Public Notification: Notifying the public of the company’s status becomes a legal requirement. This means that all company correspondence and invoices must clearly state that the company is in administration.

How Long does Company Administration last?

An administration will automatically finish after one year; however, the administrator can apply to the court to have this period extended for a specified amount of time.

Some complex administrations can last for up to three years.

Selling a Business as a Going Concern During Administration

When a company enters administration, one viable route to maximise returns for creditors and potentially preserve jobs is to sell the business as a ‘going concern’.

By selling the business in its operational state, there’s a higher likelihood of preserving jobs and maintaining the workforce. Often, the collective value of a business operating as a going concern is higher than the sum of its parts sold separately. Existing contracts and relationships can often continue with minimal disruption, fostering trust and stability in the market.

While selling as a going concern has its advantages, it’s not without challenges. The business might be perceived as ‘distressed’, potentially affecting its market value. There’s also the challenge of finding a suitable buyer within the limited timeframe of administration.