Administration is a company rescue procedure outlined by the Insolvency Act 1986.
We are highly experienced in advising small business clients on whether going into administration is the best option. There are advantages and disadvantages and each business has a different situation. You can rely on our experience, so please do get in contact.
The information below should help with what going into administration means, and how best to approach it as a director.
Going into Administration: Definition
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, (an 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 all be to ensure the best possible return for those owed money.
Moratorium on Legal Action
A moratorium is a court order designed to offer breathing space, meaning that the creditors cannot start insolvency proceedings, or take legal action against the firm once the administration procedure has been implemented.
Once the limited company has entered administration, control of the day to day operations 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 IP has a period of 8 weeks to assess the situation before sending out detailed administration proposals to creditors as to what strategy the IP expects to use to repay the debts.
The administrator’s proposals will also include details of the expected outcome of putting a business in administration, based on their reading of the situation.
Company going Into Administration – suitable or possible?
When a company goes into liquidation it’s because the end of the road has been reached, and all that remains is to liquidate any assets which remain and distribute the proceeds to creditors.
Liquidation is an insolvency procedure that means the demise of a company, the loss of all jobs, and it’s eventual striking off the register at Companies House.
The administration of a business, on the other hand, is potentially an option, typically 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 the best chance of recouping what they are owed.
When a company continues to trade during the process it is known as a ‘trading administration.’
The company will have a period of time where it is managed by an appointed administrator (who will also be a licensed insolvency practitioner).
Role of Administrator
- 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 8 weeks of appointment setting out the plans for the business.
Who can put a Company into 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 decide 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.
What Does Going Into Administration Mean for Employees?
As a business rescue process, administration usually involves substantial restructuring as the insolvency practitioner attempts to bring the company back to solvency.
For employees, the administration process may well bring redundancies and job losses. In this instance, the crucial point for the employees concerned is whether this happens in the first 14 days of the administration. Those that experience job losses in this period become what are called ‘ordinary creditors’ meaning they fall lower down the queue of creditors owed money by the company.
Those who retain their jobs beyond 14 days become ‘preferential creditors’ meaning they stand a much higher chance of being paid their statutory entitlements.
Read our full article here on employee rights in insolvency.
Advantages and Disadvantages
A comopany going into administration 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. Another red flag is that 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.
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.
Can You Stop or Prevent Going Into Administration?
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 (also called simply a pre pack) 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.
Pre packs 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.
With a pre pack, 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.
Can a Company Recover?
While it is commonly assumed administration will mean the end for a company this is by no means the case.
Certainly, it’s the Insolvency Practitioner’s job to recoup the best deal for creditors but their skillset also includes business restructuring, so it’s possible the measures introduced will return the company to profitability.
In fact, business recovery is the principle reason administration is chosen: if it were perceived that the company had no future then liquidation would simply be chosen instead.