There are two main types of administration: trading administration and pre-pack. Both involve appointing an insolvency practitioner (IP) as ‘administrator’.
In a trading administration, the company trades forward under the protection of the administrator until it is restructured, sold or closed. An insolvency practitioner is appointed to take control of the company and will often immediately start the process of restructuring the business. This might mean attracting finance or private investors, or cutting back on overheads, costs and under-performing areas of the business. If the problems are resolved, the company can be returned to the control of the directors. However, because to the high cost, this only happens in practice with large, high profile businesses.
With a pre-pack, everything is planned in advance, so the administration itself is very short. There are certain codes of conduct that apply to Insolvency Practitioners who market the business, called SIP 16. It’s certainly not a free for all, but effectively the pre-pack is an agreement to sell the company as soon as it goes into administration. The administration and sale can be on the same day, so there is no need for the IP to run the company.
A pre-pack administration is a powerful business turnaround technique. And remember, there is nothing wrong with the business being sold to the original directors and shareholders. This essentially allows the debts of the old company to be written off. The business is restructured for success and continues to trade. Most of the time you can keep the same premises, suppliers, staff and company name.
Pre-pack administration sometimes has negative connotations when former directors and shareholders are seen to be walking away from liabilities. However, the business was already insolvent and the pre-pack administration process is designed to preserve enterprise and jobs. It’s not about punishing directors and business owners for a business failure.
The process of getting a company into administration is usually straightforward. With the directors’ authorisation, we can file a notice of intention to appoint administrators with the court. This stops all pending legal recovery action, like winding up petitions, utilities being cut off or even eviction from commercial premises.
If your bank or a third party has a debenture it becomes more complex. Call us for further information.