Company administration is a formal means of attempting to rescue an insolvent company.

It requires the services of a licensed insolvency practitioner.

While not the most appropriate solution for every business, there are certain circumstances where a company administration is the ideal approach to keeping the limited company running while bringing the best return for creditors.

In this article, we’ll explore the definition, process and consequences of going into administration.

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Company Administration: Definition

Company administration is a formal procedeure whereby an insolvency practioner, acting as administrator, attempts to rescue the business as a means of bringing about the best return for creditors.

Both a limited company and a limited liability partnership (LLP) can go into administration. It’s a process that’s appropriate for an insolvent – or contingently insolvent – business.

It brings with a moratorium {protection from legal action by creditors such as HMRC), meaning no one can apply to wind up your company while the process is underway.

Why Would a Company Go into Administration?

Administration is an option for larger companies that are in debt and unable to pay the money they owe and where one of these conditions applies:

  • a better return can be offered to creditors via keeping the business open
  • the business remains viable and with the potential to return to profitability
  • when it’s a nationally recognised brand (i.e. a football club) which needs time to restructure while a sale can be agreed
  • where secured or preferential creditors are seeking to realise property

What Happens When a Company Goes into Administration?

The principle mechanism of administration is an 8 week moratorium against creditor pressure (this includes bailiffs, asset-based lenders, landlords, hire-purchase companies etc) that allows an administrator to restructure the company.

The administrator (a licensed insolvency practitioner) has a primary goal of repaying company creditors to the best of his ability, without showing preference.

The Company Administration Process

  1. Appointment of administrator
  2. After appointment, the IP has 8 weeks to send out the formal proposals for the administration to all of the creditors
  3. Proposal must be voted on and passed by creditors for the process to continue
  4. Creditors meeting (usually virtual)
  5. IP must send out statement of affairs ever 6 months
  6. At a certain point the administrator exits the administration, either through a areturn to profitability, Company Voluntary Arrangement, pre-pack sale or liquidation.
  7. Administration automatically ends after a 12-month period, unless it is formally extended

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.

Role of the Administrator

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.

What is a Pre-pack Administration or administration pre-pack sale?

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.

How long does Going into 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.

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
Unsecured Creditors
Interest incurred on all unsecured debts post insolvency
Shareholders

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: info@companydebt.com to discuss your situation in complete confidence.