Going into administration is a complex and expensive process which isn’t right for everyone. When used correctly, however, it can often a valuable opportunity for a company to turn its fortunes around, protected by a legal moratorium on creditor action.
While the immediate goal of the process is to ensure the best return for creditors, it also offers ailing company’s a chance to look deeply into their core processes and find a return to profitability. This article will clarify what type of companies the process is best suited for, and when the right time to consider it.
Companies must Remain ‘Viable’
One common misconception for directors is that administration is available to everyone. If a company has reached a point of insolvency, going to administration is only an option if the company:
- Is of a reasonable size
- has a cash flow forecast that is predictable
- offers the potential for a return to profitability.
If a company, for example, has no assets to speak of, and cannot demonstrate ongoing cash flow then administration is not appropriate.
When is the Right Time to go into Administration?
A State of Insolvency
When a company has reached insolvency (meaning it fails the insolvency test), you are presented with several options which include liquidating the company, selling assets via a Pre-Pack Administration or, if the potential to continue is there, going into administration. A state if insolvency means you are unable to pay your debts, or where your assets are less than a number of your liabilities. As soon as you have reached this situation, you are no longer bound as a company director to put your shareholders first. Instead, satisfying your debts to creditors becomes your primary responsibility.
Creditor Pressure Including Threats to Wind Up
If you have either received a Winding up Petition or are facing threats of being wound up by angry creditors, administration can offer a tremendous reprieve from pressure. Once in administration, you can rest assured that bailiffs aren’t going to haul away your business assets or enforce court orders. The business may keep on running for the time being.
Struggling with Overhead Costs
If a business is weighed down with mounting costs, such as staff or leases, you may not be at the point of insolvency just yet, but the warning bells will be ringing. Again, there would need to be the possibility of turning the company around to warrant the choice of administration, but where these circumstances apply, administration may be a solution.
If you are considering putting your business into administration, you should always seek professional advice in advance. We’re always happy to help, simply give us a call on 0800 074 6757 for a no-obligation, free consultation. Or chat using the Live Chat box on the bottom right of the screen.