If your company is struggling under the weight of financial pressure and unable to pay bills when they fall due, the risk of insolvency is very real.
One of the options available to the directors and owners of a limited company is to put the business into company administration.
While administration is not the most appropriate solution for every company, there are certain circumstances where a company administration is the ideal approach to keeping the business running in the long term, while bringing the best return for creditors.
In this article, we’ll explore the definition, process and consequences of going into administration.
Why Would a Company Go into Administration?
You can put your limited company or limited liability partnership into administration if it’s in debt and unable to pay the money it owes.
The administration protects the business from legal action and prevents creditors from applying for a winding-up petition to force the closure of your business.
Eight Week Moratorium
Going into administration grants a business an 8 week moratorium during which it can find respite from creditors, while the administrator puts forward a proposal to the creditors.
The Company Administration Procedure can be used to:
- Rescue a company that’s struggling to pay its debts and keep it as a going concern;
- Achieve a better result for the company’s creditors than if the business was immediately wound up;
- Realise property for the benefit of secured or preferential creditors if neither of the above resolutions are possible.
So, if your company is insolvent now but may have assets, property or a contract that will provide a more positive outcome then administration may be the answer.
Can a Company Still Trade When in Administration?
It is commonplace for companies to continue trading while in administration. This is known as a ‘trading administration.’
Trading administrations are usually opted for in the case of a big brand, perhaps a well known retail store or a football club. In these instances, there would be negative PR should the business close its doors which would damage the brand as a whole, hence the decision is made to keep things running while the administrator works behind the scenes.
How is the Administrator of a Business appointed?
An administrator can be appointed in one of three ways:
- By court order on the application of the company or its directors, or by one or more of the company’s creditors;
- By the holder of a floating charge who files a notice at court;
- By the company or its directors filing a notice at court.
Filing a notice of court is a quick and simple process that can be completed without a court application or hearing.
In most cases, the directors apply to the court and a formal hearing is heard to place the company into administration. A court order is the only way a creditor can initiate the administration process. However, a court order is also necessary if:
- The company is already in liquidation;
- There is an administrative receiver in office;
- A provisional liquidator has been appointed;
- There is an outstanding winding-up petition against the company.
Role of the Insolvency Practitioner
The administration is managed by an insolvency practitioner, who essentially becomes the new chief executive of the company and takes the responsibility of managing the company away from the directors.
The administrator has eight weeks to write a statement setting out what he/she intends to do. This will be one of the following:
- Restore the company’s viability
- Come to an arrangement with creditors
- Sell the business as a going concern
- Realise assets to pay a preferential or secured creditor
A copy of the statement must be sent to the company’s creditors, the employees and Companies House. The creditors and employees will then be invited to a meeting to amend or approve the plans.
The key objective for an administrator is to rescue the insolvent company by restructuring its financial affairs. This can include anything from negotiating new terms with landlords and creditors, to initiating contracts on behalf of the company.
Sale as a ‘Going Concern’
Since the administrators job is to find the best return for creditors, one possible conclusion may be to sell the company.
In some cases this is done via a procedure known as a pre-pack before the company is in administration. Where it happens afterwards, the insolvency practitioner will usually restructure the company to improve its general situation before putting it on the open market.
Since administration is a business rescue procedure the administrator will look for opportunities to pay creditors without negatively affecting the business or risking liquidation.
Restructuring, which may involve selling hard or soft assets, and
redundancies, are very much within the province and skill set of the Administrator.
The goal is to free up working capital, reduce ongoing costs and leave the company leaner, meaner and more efficient.
How Long does an Administration Last?
An administration will automatically finish after one year; however, the administrator can apply to the court to have this period extended for a specified amount of time.
Some complex administrations can last for up to three years.
What Happens to Company Directors?
As already described, during the process of administration, the directors’ ability to control the company comes to an end. They still have a duty to cooperate and assist with the administration, but they cannot make decisions relating to the management of the company without the say-so of the administrator.
In some cases, to improve the outcome of the administration, the directors are given some decision making powers. However, this is completely at the discretion of the administrator.
What is the Difference Between a Company in Liquidation and Administration?
In liquidation the company is closed and its assets sold. Companies that go into administration are considered still ‘viable’ which means they may yet live to see another day if the correct restructuring takes place.
When a Company Goes into Administration who gets Paid First?
Debts are paid in an administration, as with all insolvency events, in order of priority.
|Priority of Creditors in Insolvency|
|Fixed Charge Holders|
|Insolvency Practitioners, including expenses|
|Floating Charge Holders|
|Interest incurred on all unsecured debts post insolvency|
How can we help
If you’re considering an administration, or would like to know whether an administration is a good fit for your business, please get in touch with our specialist team of company rescue experts today.
Call 08000 746 757 or email: [email protected] to discuss your situation in complete confidence.