The voluntary administration process was designed to protect companies that can no longer pay their bills while a restructuring plan is put in place. The administration is managed by an insolvency practitioner, who effectively becomes the chief executive of the company.
Their key objective is to rescue the insolvent company by restructuring its financial affairs in such a way that it can continue to trade. However, if this is not possible, the insolvency practitioner’s next priority is to sell off the company’s assets for the benefit of its creditors.
One of the potential exit routes out of administration is for the company to be sold as a going concern. In this case, the business can be sold on an open market basis or via a pre-packaged (pre-pack) sale.
If the insolvency practitioner (also known as the administrator) believes there is a good chance the business could return to profitability in the future, an open sale might be the best option. In this case, the insolvency practitioner will advertise the business on the market with the aim of maximising creditor returns and safeguarding jobs.
Before placing the business on the market, the administrator will usually do a certain amount of business restructuring to make it ready for sale. This will usually include reducing the business’s costs as much as possible. At this point, the company directors will have no say in this process.
Once the business is placed on the market, the administrator will be wary of too quick a sale, which could prevent them from achieving the best possible price. On the other hand, they will not want the business to be on the market for too a long period of time. This prolonged period of uncertainty will adversely affect the company’s employees.
Alternatively, it could be the case that the directors of the company want to pursue a pre-pack sale. A pre-pack sale is not suitable for every business, so company directors will need to seek professional guidance before the sale is agreed.
In many cases, pre-pack sales are made to connected parties. Directors or shareholders of the old company buy the more profitable parts of the business and commence trading under a new name. The sale of the business’s assets is overseen by an administrator, who must ensure the assets are marketed and valued properly to protect the creditors’ interests.
What are the implications for the business’s stakeholders?
• For Employees
Employees who are retained by the company for the first two weeks of the administration will become preferential creditors. This means they are more likely to receive money they are owed in wages, unpaid pension contributions and holiday pay.
Those employees transferred to the new company after the sale will also have their existing employment contracts protected by Transfer of Undertakings (Protection of Employment) or TUPE legislation. However, the terms and conditions of their employment can be altered by the administrator if it will improve the business’s future prospects.
Employees made redundant as a result of the sale will be able to claim from the National Insurance Fund. This will pay the workers’ wages for up to eight weeks; will cover unpaid holiday pay for six weeks, and pay any unpaid pension contributions.
• For Creditors
An administration ceases any legal action that has been taken by creditors against the company. It is the administrator’s priority to provide a better return for creditors than if the company had been liquidated. If this cannot be achieved, the administrator’s objectives change to achieving a better return for preferential and secured creditors.
Unsecured creditors will not be able to influence the administration proceedings. They should submit their claim to the administrator in writing and will have to wait to see whether they are repaid in full, in part, or not at all.
• For Directors
The company directors lose control of their business as soon as the administrator is appointed. If they choose to take the pre-pack administration route, they will have to fund the purchase of the business’s assets using their personal funds.
When the old company is liquidated, they will also have their conduct in the running of the company investigated. Any evidence of wrongful trading could result in penalties, a director disqualification or even personal liability for a proportion of the company’s debt.