What Happens When A Company Goes Into Administration?July 26, 2019
Wondering what happens when a company goes into administration?
Administration can be a daunting process for company directors – but the aim of the procedure is to try to rescue the company, not end it. Often, going into administration can offer the best chance of recovery for the business.
In this blog, we’ll explain what happens when a company goes into administration.
What is administration?
Administration is a robust insolvency procedure for securing control when a company is insolvent and facing serious threats from creditors. The directors, or a ‘secured’ creditor (like the bank), can make an application to the court to appoint a licensed insolvency practitioner as an administrator.
The appointment of an administrator, or (in some cases) the delivery of notice of the intended appointment of an administrator, places a protective barrier around the company. Formally referred to as a moratorium, this barrier stops all legal actions against the company.
What are the objectives of administration?
In order to understand what happens when a company goes into administration, we must first look at the objectives of the procedure.
To be able to use the procedure, one of three purposes must be achieved:
- The primary aim is to rescue the company as a going concern. If this is not possible, objective two is considered.
- The second (i.e. next best) aim is to sell the business and its assets, therefore providing the company creditors with a better outcome than if the company had first gone into liquidation. If this purpose is not attainable, the last objective must be achieved.
- The final aim is to realise assets in order to pay a dividend to secured and/or preferential creditors – which will mainly be unpaid wages and holiday.
What are the criteria for a company to go into administration?
To go into administration, the company must be insolvent. This could be either balance sheet insolvent (the amount owed is more than the amount the company has) or cash flow insolvent (the company cannot pay its debts as they fall due). See here if you would like more information on how to know if your company is insolvent.
Additionally, the company must have assets or some value which can potentially be sold or turned into cash in order to achieve one of the purposes mentioned above.
What happens when a company goes into administration?
The court, the directors, the company itself, the shareholders or a qualifying floating charge holder (a debenture holder) may appoint a licensed insolvency practitioner to act as administrator. This will place a moratorium over the company, stopping all legal action against it.
If you are unsure if you may be a debenture holder, you can find out more about what debentures are and how they work by reading our blog.
The moratorium prevents creditors such as finance companies, lenders, HMRC and landlords from taking any further action against the company. For example, a landlord cannot change the locks and people cannot take their goods or equipment away. A liquidation cannot provide this protection.
What are the benefits of administration?
One benefit of administration is that it can be quick to begin the process. There is no requirement to report or give notice of intention to appoint an administrator to unsecured creditors or shareholders (unlike with liquidation).
The quicker the process, the sooner the company is protected from serious threats from creditors.
Furthermore, when a company is in administration, it prevents the financial position of the creditors from worsening. Additionally, if a pre-pack sale is arranged, then the continuity of the business can be protected.
What is a pre-pack administration?
In a pre-pack administration, a sale of the business or its assets is negotiated with the buyer before the appointment of the administrator, who facilitates the sale. The administrator is then appointed either as soon as the business is sold or shortly before it is concluded.
The idea of a pre-pack is to ensure the goodwill of the business isn’t compromised, thereby avoiding adverse publicity and saving jobs and contracts. It’s especially useful when there’s something sensitive at stake or reputation to be preserved.
What is a trading administration?
In a trading administration, the company continues to operate following the appointment of an administrator.
If the administrator chooses to continue trading, it’s likely that they and the directors are working towards the first purpose of rescuing the company as a going concern.
How long does administration last?
Administration initially lasts for 12 months. However, this period can be extended either by requesting consent from a secured creditor (debenture holder) or preferential creditors (unpaid employee wages or holiday), or by making an application to court.
The period may be extended if more time is needed to meet the objectives, or if it’s in the best interests of the creditors.
What’s the role of the administrator?
The administrator takes over the management of the business with the view of achieving one of the three objectives. The directors’ powers cease on the appointment of the administrator. However, the administrator may choose to keep the directors as employees if they believe it will benefit the administration.
The administrator has a duty to present to the creditors – within eight weeks of their appointment – their proposals, a written report which outlines the objective of the administration, and the strategy they intend to adopt.
The administrator then has an obligation to keep the creditors updated on the progress.
What happens at the end of administration?
We’ve gone over what happens when a company goes into administration – but how does it end?
Common ways to end administration include placing the company into a creditors’ voluntary liquidation (CVL) or a company voluntary arrangement (CVA), or dissolution of the company (striking off).
How the procedure ends will depend on the specific circumstances of the administration.
What happens when a company goes into administration? Summing up
It can be intimidating thinking about going into administration, but it’s important to remember that it doesn’t necessarily mean the end.
Administration can be an effective recovery option for insolvent companies, with the moratorium providing vital time to form a plan of action.
If you want to know more about this process, please don’t hesitate to get in touch with us – we’d be more than happy to help.