What Does Going into Administration” Mean for a Company?
Administration is a formal insolvency process aimed at rescuing insolvent companies.
When a firm is going into administration, the procedure and the company are managed by an administrator, whose goal is to restore the company to profitability.
When companies are in entering the process, a moratorium is placed on the company, meaning that the company’s creditors cannot start insolvency proceedings, or take legal action against the firm once the procedure has been implemented.
Why Would a Company Go into Administration?
Placing a company in administration gives it a chance to survive.
Under the guidance of a licensed insolvency practitioner (the administrator), there is the chance for restructuring and protection from legal action within an agreed time frame.
It is the IP’s job to find the best solution for creditors which may mean negotiating a CVA, selling assets and reducing staff to make the company more efficient, or selling the business to another company.
How Long Does it Take?
The process of entering administration can administration can take as little as a few hours but in most cases it takes 1-2 weeks to gather the necessary paperwork, and find the right administrator.
What is the Administrator’s Role?
The company will have a period of time where it is managed by an appointed administrator (who will also be a licensed insolvency practitioner).
The administrator’s aim is to promote the recovery of the company during the process.
The administrator effectively replaces the directors’ roles in managing the company, although the directors will remain with a duty to cooperate with and assist the administrator.
While the administrator’s main role is to promote the recovery of the company, it may be that he feels it is more suitable to come to arrangement with the company’s creditors, sell the business as a going concern or realise assets to pay the company’s creditors.
The administrator will provide a written statement within eight weeks of his appointment stating what he intends to do with the company.
When is Going into Administration Appropriate?
Companies that are facing serious financial difficulties and have significant prospects for recovery may be well suited for this procedure, given the chance to restructure without increasing pressure from creditors.
Often in these situations, there may have already been threats from creditors over debts that are owed.
Can a Director or Shareholder Manage the Administration?
The directors of a company can voluntarily elect for this procedure to be implemented.
Holders of qualifying floating charges or the shareholders of a company can also select to enter administration, providing certain requirements are met. However, the procedure itself must be managed by an appointed Insolvency Practitioner (Administrator).
How Long Does Administration Last?
The administration process can go on for up to a year, depending on the complexity of the business situation.
Administrators have a time constraint of 8 weeks to send out their proposals to company creditors.
While complex administrations can stretch on for months, it is rare that the Insolvency Practitioner themselves would run the company for longer than 6 weeks. See our full article on this here.
Advantages and Disadvantages
The process can be a good option if it is not possible to negotiate a Company Voluntary Arrangement with an insolvent company’s creditors.
The fact that control of the company is handed over to the administrator can be a benefit too as they will be experienced in helping turn around struggling companies.
The moratorium is also beneficial as it allows the company time to recover without the possibility of being wound up.
In terms of disadvantages, administrators are often expensive and the process can be a costly one. It’s a very public process and this can have an effect on the business.
The question of what will happen to employees is also important as the rules are complex.
Can You Stop Your Company from Going into Administration?
The best way to prevent going into administration is to avoid your company’s insolvency before it happens. This means looking your financial situation squarely in the face as soon as the warning signs present themselves and taking professional advice.
Once your are officially insolvent and there has been the formal appointment of an administrator, things have advanced too far to turn back.
That said, the earliest possible action allows for the possibility of negotiating a pre-pack administration, which may be a preferable option.
What is Pre-Pack Administration?
Pre-pack administrations are when the negotiations for the sale of a company’s business to a third party takes place before an administrator is appointed and the sale takes place on or shortly after the appointment of the administrator.
They are increasingly being used by companies for a number of reasons, not least because they are quick and often maintain the continuity and value of the business sold.
The third party buying the business may be an unconnected buyer or may be a new company formed by the existing company’s directors for this specific purpose.
Need Guidance on Company Administration?
If you are considering Administration for your company, you should always speak with someone who will be able to talk you through the merits of your business against other options. We’re always happy to help, simply give us a call on 08000 746 757 or chat using the Live Chat box on the bottom right of the screen for free advice.