What Does Going into Administration Mean for a Company?
Administration is a common company rescue procedure.
In this article we’ll explain what it means, and how best to approach it as a company director.
What Does it Mean When a Company Goes into Administration?
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, (an insolvency practitioner), whose goal is to restore the company to profitability.
Despite this, the insolvency practitioner has a primary duty to the company creditors, so their actions will all be to ensure the best possible return for those owed money.
Moratorium on Legal Action
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.
What Happens When a Company Goes into Administration?
Once the company has entered administration, control of the company passes to the insolvency practitioner.
The administrator will begin by doing a complete inventory of company assets as he/she looks for ways to repay the creditors, without preference.
The administrator has a period of 8 weeks to assess the situation before sending out detailed proposals to creditors as to what strategy the IP expects to use to repay the debts.
The administrators proposals will also include details of the expected outcome, based on their reading of the situation.
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. Often the IP must take very tough decisions with a wide impact in order to keep the company alive.
What is the Difference Between Going into Administration and Liquidation?
When a company goes into liquidation it’s because end of the road has been reached, and all that remains is to liquidate any assets which remain and distribute the proceeds to creditors.
Administration, on the other hand, is an option for larger companies which may yet return to profitability. Administrations often hit the newspapers when related to football clubs, for example. In these examples, the football club is highly unlikely to be closed completely but instead needs to restructured and run in a very different way moving forward, so the creditors have their best chance of recouping what they are owed.
What is the Insolvency Practitioner’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.
Can a Director or Shareholder Implement 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).
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.
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 or Prevent It?
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.
While liquidation is the process of realising the assets of a company prior to striking it off the register at companies house, administration is commonly used to keep a company alive in the hopes it will return to profitability.
Administration can be an uncertain period for employees. The extent to which you get paid will depend on what the outcome of the administration is, and what is your official employment status. Assuming you retain your job for more than 14 days into the administration, you stand a better chance of recouping what you’re owed, although it is not certain.
Those who remain employed after 14 days become ‘prefential creditors’ meaning you will be amongst the first to be paid from the company restructuring, assuming enough money is present.
It is common for businesses in administration to keep trading, as they have more value as a going concern.
UK insolvency law divides creditors into different classes, with the top classes considered priority creditors. Fixed charge holders have the first claim, followed by those who are owed expenses from the estate. Next comes preferential creditors, followed by floating charge holders and finally unsecured creditors.