Administration is an option for a company facing financial strain or creditor pressure.
What is Administration?
Administration is an option for a company facing financial strain or creditor pressure. In many cases, a company which enters Administration can preserve the core business, and maintain continuity with its customers, and staff.
A company in Administration is legally protected from the commencement (or continuation) of any action against it. This protection provides ‘breathing space’ and gives the company’s Board time to put together a plan of action which could include restructuring, assessment of cash-flow and future plans, or even marketing the business for sale.
Typically, a sale is agreed before the Administration. This is widely known as pre pack administration and involves a sale to (all, or a number of) the existing directors operating a newly formed company.
In any case, a sale of the business must be viable and a buyer will need to demonstrate that the newly formed company has a good prospect of success.
Is Administration a suitable option?
If a company is insolvent, usually meaning that it cannot pay invoices as and when they fall due, but the business itself has the potential to trade successfully in the future, then Administration may be the most appropriate option.
It can also be the most appropriate option when a company is faced with significant pressure from its creditors, or the threat of enforcement action.
There are three reasons why a company could enter into Administration
- To rescue the company as a going concern;
- To achieve a better result for creditors as a whole than if the company were to be wound up;
- To realise property in order to distribute to one or more secured or preferential creditors.
Overall suitability will depend on many factors. The first step in assessing whether or not this is the most appropriate solution will be to seek advice from a licensed Insolvency Practitioner (“IP”). The IP will work closely with the directors and senior management to review the company’s position.
If it is agreed that Administration is the best option, that IP can be appointed as Administrator to the company. If it is resolved that it is not suitable for the company to enter into administration, then the IP will explore the other options available, such as liquidation.
What does the Administrator do?
An Administrator must be a licensed IP, and acts as an officer of the court (whether or not he or she is appointed by the court).
Generally, an Administrator will take any action which is necessary regarding the management of the company, its business or any of its property.
An Administrator has certain powers which enable him (or her) to perform their duties, and for the duration of the Administration, these powers take precedent over existing management. However, it is almost always preferable for the Administrator to work closely with the directors, and key members of the business to ensure that a successful outcome is achieved.
However, Directors usually remain at the forefront of the business and are key to driving it forward.
Benefits and Risks of Administration
The main benefit of Administration is the possibility of rescuing the company as a going concern, or at least, the business itself. The aim is to ensure minimal interruption to trading, and provide continuity to customers and staff, which will preserve the value of the business.
Administration will also prevent creditors from taking legal action, or continuing with an action which has already been started. The company will be protected from negative action for the entire period of the administration, and the Administrator will liaise with existing creditors on the company’s behalf.
The Administrator will ensure that all decisions made during the Administration are taken with the interest of the company and its creditors’ in mind, and will prevent the company’s financial position from worsening.
It is possible that a proportion of the company’s debts will be written off. The amount which could be written off at the end of the process is dependent on the company’s circumstances. The Administrator will communicate clearly with creditors, directors and stakeholders regarding the financial position and likely outcome throughout the process.
The process can be executed very quickly. A pre packaged administration could be completed within a matter of weeks.
There are some risks to Administration and these should be considered in full.
When a company enters into Administration, this becomes public knowledge. The Administrator must notify Companies House, publish notice of their appointment, and write to all creditors. In addition, future communication (written or electronic) must state that the company is “in Administration” and managed by the Administrator.
Whilst the company is in Administration, the Directors will not retain overall control of the company’s affairs. The Administrator will make decisions in the interest of the company itself, and must ensure that a positive outcome is achieved for the creditors. In rare circumstances this could result in the sale of the business to a competitor.
In relation to a pre-pack administration, TUPE regulations will apply. This means that the purchasing company will transfer the employee’s, and their contracts of employment over the new company. This could be problematic if the new company does not have sufficient funds to meet these payroll costs.
There is a degree of negative publicity surrounding the process of Administration. Some believe that the process is used by directors who ‘do a deal’ with the Administrator, and then carry on a successive business whilst leaving debts behind. However, all IP’s are subject to an ethical code and various statements of good practice.
Careful consideration must be given to all options available to a financially distressed business. For more advice, fill out our contact form and we will be in touch.
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