Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
Going into administration is a formal insolvency procedure designed to protect insolvent companies from creditor actions while attempting to rescue the business or achieve a better outcome for creditors than immediate liquidation.
When you enter administration, an insolvency practitioner takes control of your company’s affairs. This provides a breathing space, known as a moratorium, during which creditors can’t take legal action against your business. This valuable time allows for a thorough assessment of your company’s situation and the development of a rescue plan[1]Trusted Source – R3 – Corporate Insolvency Procedures, Administration.
While administration can be a powerful tool for saving your business, it’s not without challenges. It can be expensive and doesn’t guarantee your company’s survival[2]Trusted Source – GOV.UK – Put your company into administration.
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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.
If continuing operations can yield a better return for creditors than immediate closure or liquidation.
Where the business has a strong foundation and the potential to regain its profitability with the right interventions.
Some entities, like renowned football clubs or other nationally recognised brands, are considered too big to fail. Administration allows them time to recalibrate and negotiate sales.
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?
An insolvency practitioner takes control of your company as the administrator. Their primary goal is to act in the creditors’ best interests, aiming to rescue your business or maximise returns for creditors.
Your company receives protection against creditor actions. This moratorium prevents lawsuits or winding up petitions, giving you breathing space to address financial issues.
The administrator conducts a comprehensive review of your company’s finances, operations, and assets. They’ll develop a strategy that may involve restructuring, asset sales, or identifying potential buyers.
Throughout the process, the administrator will keep your creditors informed about the company’s financial state and their plans for recovery or asset realisation.
Depending on the chosen strategy, the administrator might negotiate with creditors, sell parts of your business, or seek new investments.
Administration can conclude in several ways:
Your company is rescued and continues trading
The business is sold as a going concern
Assets are sold, and the company is liquidated
In rare cases, the court terminates the administration order
What are the Pros and Cons of Administration?
Pros
Creditor protection: Shields your company from legal actions, giving you breathing space.
Restructuring opportunity: Provides a framework for reshaping your business into a more viable entity.
Business continuity: Offers a chance to continue trading, preserving jobs and stakeholder value.
Improved creditor returns: May yield better outcomes for creditors than immediate liquidation.
Brand preservation: Protects your company’s reputation, enhancing appeal to potential buyers.
Cons
Loss of control: Directors relinquish company management to the administrator.
Public disclosure: Your company’s financial troubles become widely known, potentially affecting reputation.
Expensive process: High costs may reduce returns to creditors.
Uncertain results: No guarantee of business rescue; liquidation remains possible.
Potential redundancies: Business restructuring or partial closures may lead to job losses.
The Role of an Insolvency Practitioner in Company Administration
When your company enters administration, an insolvency practitioner (IP) takes a pivotal role. This licensed professional becomes the administrator, effectively taking control of your company’s operations.
The IP’s primary responsibilities include:
Assessing your company’s financial situation
Formulating a strategy for recovery or orderly wind-down
Communicating with creditors
Executing the chosen strategy
Concluding the administration process
Remember, the IP’s goal is to achieve the best possible outcome for all stakeholders. This could mean restructuring your company for continued trading, selling it as a going concern, or, if necessary, liquidating assets to repay creditors.
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.
Selling a Business as a Going Concern During Administration
Selling a business as a ‘going concern’ can be an effective exit strategy from the administration.
Key benefits of this option include:
Higher overall value compared to selling assets separately
Preservation of jobs and workforce skills
Continuation of existing contracts and customer relationships
Maintenance of market presence and brand value
By selling your business as an operational entity, you’re offering a buyer a ready-to-run operation. This can be more attractive than a collection of individual assets, potentially leading to a higher sale price.
However, this approach isn’t without challenges. Your business may be viewed as ‘distressed’, which could affect its perceived value. Additionally, finding a suitable buyer within the timeframe is sometimes demanding.
Frequently Asked Questions about Company Administrations
What are the potential outcomes of a Company Administration?
The potential outcomes of a Company Administration include:
The company is rescued as a going concern and continues to trade
The company’s business or assets are sold to a third party
The company enters into a Company Voluntary Arrangement (CVA) with its creditors
The company is wound up (liquidated)
What Happens to Staff When a Company Goes into Administration?
If the business continues trading or is sold as a going concern, many employees may keep their jobs. In a sale, they might transfer to the new owner under TUPE regulations. However, if restructuring is necessary, some redundancies will occur.
Employees become preferential creditors for unpaid wages up to £800. If the company can’t pay, they may claim certain payments from the National Insurance Fund.
Throughout the process, the administrator must consult with employees about potential redundancies.
What Happens to Directors When a Company Goes into Administration?
When your company enters administration, your role as a director changes significantly. You’ll lose control over day-to-day operations as the administrator takes charge. However, you’re not automatically dismissed from your position.
Your primary responsibility shifts to cooperating with the administrator. You’ll need to provide detailed information about the company’s affairs, assets, and liabilities. The administrator may require your expertise to help run the business during this period.
Your conduct leading up to the administration will be scrutinised. If evidence of wrongful trading or other misconduct is found, you could face personal liability or disqualification.
While you no longer make key decisions, you retain certain statutory duties. You must act in the best interests of creditors and avoid any actions that could hinder the administration process.
What Happens if a Company Goes into Administration and Owes You Money?
If a company that owes you money enters administration, your position as a creditor can be uncertain. The administrator’s primary goal is to rescue the company or achieve the best outcome for all creditors.
You’ll likely receive formal notification of the administration. At this point, you should submit a proof of debt to the administrator, detailing the amount owed to you.
The administration creates a moratorium, preventing you from taking legal action to recover your debt without the court’s permission. Your chances of full repayment depend on the company’s assets and the nature of your debt.
Secured and preferential creditors are paid first. As an unsecured creditor, you may only receive a portion of what you’re owed, or potentially nothing at all.
While the situation can be frustrating, stay engaged with the process. Respond promptly to communications from the administrator and consider joining the creditors’ committee if invited. This can give you more insight into the administration process and potential outcomes.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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