What is Company Administration?
One potential solution to business insolvency is known as company administration.
But what does this mean for UK directors?
Simply put, when a company goes into administration, it’s a way to protect the business from its creditors while figuring out the best next steps. It could lead to recovery or, at times, a more orderly closure.
This guide will break down the basics of company administration, what it means for you as a director, and how it affects other parts of the business. By the end, you’ll have a clearer picture of what company administration entails and how it might help your business.
What is Company Administration?
Company administration, sometimes called ‘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 ensure the best possible return for those owed money.
It comes with a moratorium on legal action: 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.
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 be restructured and run in a very different way moving forward so the creditors have the best chance of recouping what they are owed.
Why Would a Company Go into Administration?
Administration is primarily a recourse for larger companies grappling with significant debts and facing challenges in settling their obligations.
It becomes a viable option under the following circumstances:
- Maximizing Creditor Returns: If continuing operations can yield a better return for creditors than immediate closure or liquidation.
- Potential for Revival: Despite its financial woes, the business has a strong foundation and the potential to regain its profitability with the right interventions.
- Preserving National Icons: Some entities, like renowned football clubs or other nationally recognized brands, may need a buffer period to restructure. Administration allows them time to recalibrate and negotiate sales.
- Prioritizing Secured or Preferential Creditors: In situations where specific creditors have a secured claim on assets or are given preference, administration can be a route to ensure that properties are realised to meet these obligations.
What is the Process of Company Administration?
So, what exactly happens when a company enters administration?
(1) Appointment of an Administrator: A licensed insolvency practitioner is appointed as the administrator. Their primary role is to take control of the company, working in the best interest of the creditors. They aim to either rescue the business or ensure creditors get the best possible return.
(2) Protection from Creditors: Once in administration, your company gets protection against any legal actions from creditors. This means they can’t start or continue with lawsuits, or petitions to wind up the company.
(3) Assessment and Plan: The administrator conducts a thorough review of the company’s finances, operations, and assets. They then devise a strategy, which could involve restructuring the business, selling assets, or even identifying a potential buyer for the company.
(4) Communication: One of the administrator’s duties is to keep the company’s creditors informed. They will outline the financial state of the company, their plans for the administration, and how they intend to secure funds for the creditors.
(5) Implementation: Depending on the strategy, the administrator might negotiate with creditors, sell parts (or all) of the business, or even seek new investments.
(6) End of Administration: There are a few ways the administration can conclude:
- The company is saved and can continue trading.
- The company is sold as a going concern.
- Assets are sold, and the company is liquidated.
- The administration order is terminated by the court (in rare cases).
What are the Pros and Cons of Administration?
- Protection from Creditors: Once in administration, the company is shielded from legal actions by creditors, offering a reprieve from potential lawsuits or winding-up petitions.
- Opportunity for Restructuring: Administration provides a structured environment for the company to be restructured, potentially allowing it to emerge more viable and profitable.
- Potential for Business Continuation: If the administration is successful, the business could continue trading, saving jobs and preserving stakeholder value.
- Maximized Returns: If the company can’t be saved, administration might provide better returns for creditors compared to immediate liquidation.
- Retained Brand Value: For well-known companies, administration can protect the brand’s reputation, making it more attractive to potential buyers.
- Loss of Control: Directors relinquish control of the company to the administrator during the process.
- Public Knowledge: The fact that the company is in administration becomes public, which could impact reputation and stakeholder trust.
- Cost: Administration can be expensive, with costs eroding potential returns to creditors.
- Uncertain Outcomes: There’s no guarantee the company will be saved. In some cases, it might still end up being liquidated.
- Potential for Job Losses: If parts of the business are sold or closed, employees might lose their jobs.
The Role of an Insolvency Practitioner in Company Administration
An insolvency practitioner (IP) plays a pivotal role in the company administration process.
Their expertise and actions can significantly influence the fate of a struggling company.
But what exactly do they do, and why is their role so vital?
1. Appointment as Administrator: When a company enters administration, a licensed insolvency practitioner is appointed as the administrator. This means they effectively take control of the company’s operations.
2. Assessing the Situation: The IP conducts a thorough review of the company’s financial health, evaluating assets, liabilities, cash flows, and operational structures. This assessment forms the foundation for all subsequent decisions.
3. Formulating a Strategy: Based on their assessment, the IP develops a strategy. This could involve:
- Restructuring the company to return to profitability.
- Selling the company as a going concern.
- Liquidating assets to repay creditors.
4. Communication: An essential aspect of the IP’s role is transparent communication. They must keep creditors informed about the company’s financial state, the administration’s progress, and potential outcomes.
5. Execution: The IP doesn’t just design a strategy; they implement it. This could involve negotiating with creditors, making operational changes, or overseeing the sale of company assets.
6. Concluding the Administration: Eventually, the IP will move to conclude the administration. This could result in the company exiting administration and continuing to trade, transitioning to another insolvency procedure, or being wound up.
7. Acting in the Best Interests of Creditors: Throughout the administration process, the IP’s primary duty is to act in the best interests of the company’s creditors, ensuring they receive the best possible outcome.
Why the Role of the IP is Crucial: The expertise of the insolvency practitioner can make the difference between a company’s revival and its dissolution. Their knowledge of the insolvency landscape, combined with their duty to act impartially, ensures that the administration process is navigated with precision, care, and integrity.
For directors, understanding the role of the IP is essential. While it might feel like ceding control, having a skilled IP at the helm can be the best chance for a company to navigate its financial challenges and find a way forward.
Legal Impacts of Company Administration
Here’s a breakdown of the impacts that the administration is likely to have legally.
- Moratorium on Legal Actions: Once a company enters administration, it benefits from immediate protection against legal actions from creditors. This means that for the duration of the administration, no legal steps can be taken against the company without the administrator’s consent or the court’s permission.
- Directors’ Powers: With an administrator’s appointment, the directors’ powers are effectively suspended. The administrator takes control of the company’s operations.
- Contracts and Agreements: The administrator has the authority to review and, if necessary, terminate contracts and agreements that are not beneficial to the company’s recovery.
- Public Notification: It becomes a legal requirement to notify the public of the company’s status. This means that all company correspondence and invoices must clearly state that the company is in administration.
Who Gets Paid First: Order of Priority in Company Administration:
- Costs of the Administration: The foremost payments are directed towards settling the costs tied to the administration process. This includes fees associated with the administrator’s services.
- Fixed Charge Creditors: Creditors possessing a ‘fixed charge’ over a specific asset (like a property mortgage provider) are prioritized next for repayments.
- Preferential Creditors: This group encompasses certain outstanding employee-related dues, such as wages and holiday pay. Their claims are settled before those of unsecured creditors.
- Floating Charge Creditors: These are creditors with a ‘floating charge’ over a collection of assets, often banks or financial institutions. They’re next in line.
- Unsecured Creditors: General creditors who don’t hold any specific charge over company assets are among the last to receive repayments.
- Shareholders: If there’s any surplus after all other debts are addressed, shareholders are entitled to their portion.
|Priority of Creditors in Insolvency|
|Fixed Charge Holders|
|Insolvency Practitioners, including expenses|
|Floating Charge Holders|
|Interest incurred on all unsecured debts post insolvency|
How Long does Company 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.
Selling a Business as a Going Concern During Administration
When a company enters administration, one viable route to maximize returns for creditors and potentially preserve jobs is to sell the business as a ‘going concern’. But what does this mean, and how does it work within the context of administration?
Understanding ‘Going Concern’: The term ‘going concern’ refers to a business that operates without the threat of liquidation for the foreseeable future, typically the next 12 months. Selling a business as a going concern means selling it in its entirety, including all assets and operations, so it can continue to trade under new ownership.
Benefits of Selling as a Going Concern:
- Preservation of Jobs: By selling the business in its operational state, there’s a higher likelihood of preserving jobs and maintaining the workforce.
- Maximizing Value: Often, the collective value of a business operating as a going concern is higher than the sum of its parts sold separately.
- Continuity for Customers and Suppliers: Existing contracts and relationships can often continue with minimal disruption, fostering trust and stability in the market.
- Assessment by the Administrator: The appointed administrator will assess the viability of selling the business as a going concern. This involves reviewing the company’s financial health, market position, and potential attractiveness to buyers.
- Marketing the Business: The administrator, often with the help of business brokers or sales agents, will market the business to potential buyers.
- Due Diligence: Interested buyers will perform due diligence, reviewing the company’s finances, operations, contracts, and any potential liabilities.
- Negotiation and Sale: Once a suitable buyer is identified, the administrator will negotiate the terms and finalize the sale.
- Transfer of Assets and Operations: Upon completion of the sale, all assets and operations are transferred to the new owner, and the business continues to operate.
While selling as a going concern has its advantages, it’s not without challenges. The business might be perceived as ‘distressed’, potentially affecting its market value. There’s also the challenge of finding a suitable buyer within the limited timeframe of administration.
Selling a business as a going concern during administration can offer a lifeline, providing a win-win for both creditors and employees. For directors, understanding this option and its implications is crucial when navigating the complexities of administration.