Company administration is a formal insolvency process that offers companies experiencing financial distress the chance to be rescued and provides a breathing space to consider all the options.
When utilised appropriately, company administration can be considered a crucial step in the company rescue process. The goal is to achieve the optimal outcome for both the company and its creditors; deciding if the company can survive, pay its creditors in full and continue as a profitable business, is a vital part of the process.
In this guide, we’ll cover everything you need to know about administrations, what you can expect and what the future looks like for you and your company.
When Would Company Administration Be Advisable?
Administration could be a suitable option for your business if it’s experiencing financial difficulties, but the company still possesses intrinsic value or has good future prospects.
If your company is in financial difficulty, but boasts a healthy sales pipeline and a reputable brand, that could be of interest to either the current management team or external parties, it’s advisable to consider the potential of administration.
Who Initiates Company Administration?
Company administration can be initiated by different entities, such as the company’s directors, creditors, or through court proceedings.
A Licensed Insolvency Practitioner can be appointed as Administrator by a court order upon the application of the shareholders, directors or creditors.
What is the Main Objective of Company Administration?
The paramount objective of the administrator is to rescue the company whenever feasible. This may entail evaluating the company’s financial position and formulating a proposal, which may include options for restructuring, refinancing, selling the business/assets, or entering into a Company Voluntary Arrangement (CVA).
Once the objectives of administration are achieved, the administrator exits and the company may resume normal operations or proceed with liquidation if rescue attempts are unsuccessful.
Where a potentially viable business is likely to benefit from continued trading, then administration is usually the most appropriate insolvency procedure. The administrator however, must be able to achieve one or more of the following three objectives:
- Rescue the company as a going concern.
- If this is not possible achieve a better result for creditors than would be likely if the company were wound up.
- Only if neither of these objectives is possible can the administrator realise property to make a distribution to secured or preferential creditors.
What is Pre-Pack Administration?
Pre-pack administration is a restructuring process in which the sale of a company’s assets is negotiated and agreed upon before the appointment of an administrator.
Pre-packs can be a useful tool to preserve value in a potentially viable business, help retain employment and provide a swift and better outcome for creditors than in liquidation.
Once the administrator is appointed, the pre-arranged sale is completed swiftly, often immediately or shortly after the administrator takes control of the company’s affairs.
Used correctly, a pre pack sale can be beneficial for a company.
Administrator objectives
Acting in the best interests of the company’s creditors is the company administrator’s primary duty. They will undertake a thorough evaluation of the company’s financial status, operational activities, and viability.
The key aim is to achieve one of the following:
- Rescue the company as a going concern.
- Attain a more favourable outcome for the creditors than if the company were wound up.
- Realise the company’s assets to facilitate distribution to secured or preferential creditors.
What to Expect with Company Administration: Step-by-Step
Company administration typically involves the following:
Appointing an administrator
A licensed insolvency practitioner is appointed as the administrator to take control of the company’s affairs and assess its financial situation. They are appointed by either the company, its directors, or a qualifying floating charge holder upon application to or by the court.
Statement of affairs
The company’s directors must provide the administrator with a statement of the company’s affairs, which includes comprehensive information regarding its assets, liabilities, and creditors.
Moratorium
Once appointed, the administrator assumes control over the company’s affairs and assets and may impose a moratorium (a freeze), shielding the company temporarily from legal actions initiated by creditors. This gives the company valuable time to formulate a rescue plan, without the immediate pressure of creditor claims.
Administrator strategy
The administrator will formulate a comprehensive strategy for company administration. This includes managing and realising the company’s assets, negotiating with creditors, proposing a Company Voluntary Arrangement (CVA), or an alternative proposal to creditors for their approval, in accordance with the Insolvency Act 1986.
Creditor’s rights
Creditors are entitled to receive notification of the administrator’s appointment, submit claims to the administrator, and participate in voting on any proposals put forth by the administrator.
Reporting requirements
The administrator must arrange a decision procedure meeting with creditors and/or shareholders to approve his/her proposals and provide them with updates on the progress of the company administration.
Distribution to creditors
If the administrator can realise the company’s assets or business, the generated proceeds will be used to cover the administration’s costs and expenses and pay preferential and secured creditors holding valid claims. If there are any funds leftover, these will be allocated to unsecured creditors.
Exit from administration
The administration may be terminated upon achieving the administrator’s objectives, such as company rescue or business sale completion, or by filing a notice of discontinuance or termination with the court, as per the Insolvency Act 1986. It may also be exited by going into liquidation or a Company Voluntary Arrangement (“CVA”) or moving to dissolution.
It’s crucial to recognise that the administration process can be intricate and the precise steps and protocols involved may differ based on the unique circumstances of each case.
Therefore, it’s advisable to enlist the assistance of our expert team to guarantee adherence to the relative legislative mandates and regulations.
How Long Does the Administration Process Take?
According to the Insolvency Act 1986 in England, the maximum initial period of administration is 12 months. While the administrator is required to perform their duties as quickly and efficiently as is reasonably possible, their appointment generally does not continue for longer than this 12 month period, However, in certain circumstances, the administration period can be extended with the consent of the creditors or a court order.
What Happens to Staff and Employees in a Company Administration?
There are laws in place to protect the employment status and rights of staff and employees when a company enters administration in England, which include the following:
Insolvency Act 1986
This states that the appointment of an administrator does not automatically terminate the contracts of employment of the company’s staff and employees. This means that the contracts of employment should remain in place, and the staff and employees continue to be employed by the company, even after the appointment of an administrator.
TUPE – Transfer of Undertakings (Protection of Employment) Regulations 2006
This is a separate set of regulations that apply if the administrator sells or transfers the business, or assets of the company during the administration process. For example, under TUPE, employees who are transferred to a new employer are entitled to have their employment contracts, and terms and conditions protected, including accrued rights, lengths of service and any collective agreements.
It also means that the new employer must comply with set obligations around aspects such as employee consultations, information provision and potential dismissals.
Specific implications for staff and employees during a company administration can vary between each unique case, as can the application of the relevant laws and regulations.
What are the Options for a Company During and After Administration?
The main options for a company in England during and after the administration process include:
Business continuation
If the financial position and prospects are deemed viable, the administrator may choose to keep the business trading during the administration process.
Sale of business/assets
The administrator may seek to sell all of the company’s business or assets to a third party as a going concern, or sell it in separate parts.
Company Voluntary Arrangement (CVA)
The company may propose a CVA to its creditors during or after the administration process. This is a formal agreement between the company and its creditors to repay debts over a period of time.
Liquidation
If the company is found to not be viable, the administrator may recommend, or the creditors may vote for the company to be placed into formal liquidation.
Dissolution
In situations where there are no assets or liabilities, the company may be dissolved or struck off the Companies Register.
What are the Advantages of Company Administration?
Company administration offers several advantages which include:
Business rescue
One of the primary benefits of administration is the opportunity it provides for the rescue and restructuring of financially distressed companies. It helps to develop a plan to return to profitability and achieve a more sustainable business model in the long term.
Protection from creditors
Upon entering administration, the company benefits from a moratorium (a temporary shield against legal actions by creditors). This allows the company breathing room to formulate a rescue plan without the immediate threat of enforcement action.
Preservation of value
Administration aims to maximise the value of the company’s assets for the benefit of all stakeholders, including creditors, employees, and shareholders. By implementing strategic restructuring measures, selling assets, or renegotiating contracts, the administrator seeks to preserve the value of the business.
Business continuity
Where the company’s underlying business is viable, administration offers a chance for the business to continue to trade and operate during the process. This can potentially protect jobs, contracts and relationships with customers and suppliers.
Flexibility
Administration offers flexibility in terms of restructuring options, allowing the administrator to tailor solutions to the specific needs and circumstances of the company. This flexibility enables creative and innovative approaches to resolving financial difficulties.
What Are the Disadvantages of Company Administration?
While company administration offers benefits, it also comes with several disadvantages, including:
Uncertainty
While the administration aims to rescue the company, there is no guarantee of success. If the administrator determines that the company is not viable or if a suitable rescue plan cannot be implemented, the only option may be to liquidate the company, resulting in the closure of the business and loss of jobs.
Cost
Administration can be expensive, with professional fees, legal costs, and administrative expenses adding up quickly. These costs can further strain the company’s finances, especially if it is already experiencing financial difficulties.
Loss of Control
Once an administrator is appointed, the company’s directors lose control over decision-making, as the administrator takes charge of managing the business and its affairs. This loss of control can be unsettling for directors and may result in conflicts or disagreements over strategic direction.
Damage to Reputation
The initiation of administration proceedings can damage the company’s reputation and erode stakeholder confidence. Suppliers, customers, and investors may perceive the company as financially unstable, leading to loss of business and difficulty attracting new investment.
Impact on Stakeholders
The administration process creates uncertainty for employees, shareholders, suppliers, customers, and other stakeholders due to the potential for job losses, disruptions to supply chains, or changes in business operations.
Why Choose Administration?
At Administration, we pride ourselves on rescuing insolvent businesses. Our professional team is here to offer practical, impartial and realistic business advice that gives you the information you need to move forward.
If you have any questions regarding company administration or need to seek some expert advice on the matter, please get in touch with us today.