What happens when a company goes into administration

Going into administration means that it is under a process that occurs when a company is facing financial difficulties and can no longer pay its debts. In this situation, the company’s directors appoint an insolvency practitioner, known as an administrator, to manage the company and its finances.

The administrator takes over control of the company and is tasked with trying to rescue the business as a going concern, by restructuring its operations and finances or finding a buyer for the company.

If the administrator is unable to do so, the company may have to be liquidated, which involves selling off its assets to repay creditors.

The primary aim of going into administration is to try to save the company and protect it from being wound up, and to maximize the return for creditors. The process is governed by the Insolvency Act 1986 in the UK.

A company can be put into administration by its directors/owners and its secured creditors. The directors will use the administration process to try and protect the company and their position. Secured creditors might force the company into administration if they are owed money by the business and believe that, as things stand, it is not going to be repaid.

Going into administration UK

Under the Insolvency Act 1986, entering company administration is a legal procedure that a company undergoes with the goal of accomplishing one of the specified objectives of the process. This could be to save a solvent business that is facing insolvency due to financial difficulties.

An administrator, who must be a licensed insolvency practitioner, will be designated either by the company directors, a creditor, or the court to manage the administration procedure.

The administration process implements a statutory moratorium, which provides a company with a temporary reprieve from enforcement actions by creditors. During this time, restructuring plans are developed to rescue the business as a going concern, if possible, through methods such as a sale to an unrelated party.

If the company cannot be reasonably saved, the administrator will strive to attain a better outcome for creditors than if the company was simply liquidated without first entering administration.

For instance, the company may continue to operate for a period of time while efforts are made to sell the business or assets, such as:

• goodwill
• trademarks
• patents
• equipment
• customer databases
• software
• content
• websites.

Alternatively, administration may be used solely to liquidate assets and distribute the proceeds to secured or preferential creditors if neither of the primary objectives can be achieved.

In administration

Once a company enters administration, it may continue its operations, but the daily management and control shifts from the directors to the appointed administrator.

Within 8 weeks, it is the responsibility of the administrator to formulate administration proposals. Creditors are then asked to vote on these proposals through a decision-making procedure.

If the administration involves the sale of all or part of the company’s business, the proceeds, after accounting for the costs of the procedure, will be distributed to creditors in accordance with a statutory order of priority. The rules for distributions are specific, but the general order is as follows:

• secured creditors
• preferential creditors (employees)
• unsecured creditors (trade creditors, suppliers
• customers, HM Revenue and Customs (HMRC)
• shareholders or members.

The administration proposals will include information about the likelihood of a dividend and its estimated timeline.

It is important to note that the statutory order of creditors changed in April 2020 as it was recently announced that HMRC is to be designated as a preferential creditor with respect to certain taxes.

What is a pre-pack administration?

The value of a company, especially assets like goodwill or the company brand, may decrease significantly once the company goes through an insolvency procedure, potentially hindering the chances of a successful business rescue. To address this, the practice of pre-packaged administration has developed.

In cases where potential buyers for the business and assets can be easily identified, a sale of all or part of the company’s business and assets can be negotiated prior to administration, with the sale being completed either immediately or shortly after the company enters administration.

The insolvency practitioner will assist the company in obtaining appropriate valuations, marketing the business, agreeing on sale prices, and drafting contracts, all in preparation for the appointment of the administrator. This process is known as a “pre-pack.”

According to Statement of Insolvency Practice 16 (SIP 16), administrators must report all the details of the pre-pack administration to creditors within 7 days of the transaction. The purchasers may be the directors, shareholders, or individuals connected to the insolvent company.

Administration, pre-packs and insolvency

Administration can provide a new beginning for companies facing real financial difficulties, as demonstrated by a successful administration case study. The process can offer the opportunity for a company to continue operating either as a whole or in part as a new going concern.

If the business is able to be saved through administration, it may also result in the preservation of some jobs. A pre-pack administration is especially useful in ensuring that the value of the business remains intact.

Therefore, it’s worth considering administration for a company facing the following challenges:

• The business is fundamentally viable but facing severe cash-flow pressures
• The need to sell the business quickly as it has become technically insolvent
• Creditors are unwilling to agree to a company voluntary arrangement (CVA) or a CVA cannot be implemented in the immediate time frame.

Why would a company go into administration?

It’s a common misconception that any insolvent company can enter into administration – it can’t. Administration is only an option if the business is insolvent but remains viable. That is:

• It’s a reasonable size
• It generates a consistent level of cash-flow
• It has the potential to return to profitability

Although the immediate goal of the administration process is to ensure the company’s creditors receive the best possible return, it also gives the business the chance to make changes to its core operations in a bid to return to profitability. To achieve this goal, the administrator can sell assets, reduce staff and negotiate a Company Voluntary Arrangement (CVA) to repay its debts without the threat of legal action from creditors.  

If a business has no assets of value, no ongoing cash-flow and no real prospect of returning to profitability, administration would not be appropriate. In that case, the only option is to liquidate the company.     

Read more: Paying my debt if a company goes into administration

Eight-week breathing space 

So what happens when a company goes into administration? During the time the company is in administration, there is an eight-week period that protects the company against any creditors taking legal action. This gives the company, and insolvency practitioner, time to address the situation and come up with a plan that is then proposed to the stakeholders invested in the business.

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:    

1. The primary aim is to rescue the company as a going concern. If this is not possible, objective two is considered.
2. 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.
3. 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.

How long does going into administration last?

It depends very much on the circumstances, but in general administrations don’t last longer than 12 months, without the courts consent.  The administrators take on the employment contracts of the company after 14 days so it is desirable that the business is sold out of administration before that date.  The insolvency practitioners are not allowed to run the business at a loss and so making the creditors position worse off.

If there are large amounts of money to collect in or substantial realiseable assets then they may trade for longer periods.  During this time they will need to report to the creditors at regular intervals.

What does going into Administration mean for employees?

What happens to staff when a company goes into administration, the insolvency practitioner attempts to bring the company back into profitability by using different rescue tools.

For employees the administration process may well bring redundancies and job losses. In this instance, the crucial point for the employees concerned is whether this happens in the first 14 days of the administration. Those that experience job losses in this period become what are called ‘ordinary creditors’ meaning they fall lower down the queue of creditors owed money by the company.

Those who retain their jobs beyond 14 days become ‘preferential creditors’ meaning they stand a much higher chance of being paid their statutory entitlements.

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.

If a company goes into administration do I have to pay them

Yes, If a company goes into administration you still have to pay them, it is the insolvency practitioners duty to collect all outstanding monies owed to the company.

Before an insolvency practitioner can end the insolvency they have to demonstrate that they taken all actions to collect outstanding monies that are owed to a company, this process must be followed in order for the company to be dissolved.

One of the first steps in this process is for the administrator to send out notice to all creditors, including any individuals who may be owed money by the company. Once this notice has been sent, the administrator will begin working on a plan to pay off the company’s debts.

If you are owed money by the company, you will be included in this plan and you may have to make a payment to the administrator in order to receive your money. However, the amount that you will have to pay will depend on the overall financial situation of the company and how much money is available to pay creditors. If the company does not

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 company voluntary liquidation, or dissolution of the company (striking off). 

How the procedure ends will depend on the specific circumstances of the administration.

Sale as a ‘going concern’

The business may be sold as a going concern if circumstances allow, either by placing it on the open market, or using what is termed a ‘pre-packaged’ sale. ‘Pre pack’ involves marketing the business prior to officially appointing administrators, and selling it on quickly to minimise loss of trade.

Members of staff may be transferred over to the ‘new co’ under TUPE – the Transfer of Undertakings (Protection of Employment) regulations, which protect their terms and conditions, and maintains a continuous term of employment.

Business Insolvency Helpline can provide more professional advice and talk you through the process with what happens when a company goes into administration, or any other aspect of corporate insolvency. We operate from a number of offices around the country, and offer a free same-day consultation in complete confidence.

Frequently asked questions

What happens if your company goes into administration?

If your company goes into administration an appointed administrator takes control with the primary goal of utilising assets to pay creditors as quickly as possible. One of the main advantages to the administration process is the protection from payment demands and time allowed to devise a plan.

Can a company survive administration?

Yes, a company can survive in administration, the aim of the administration period is to improve cash flow, save jobs, and pay off creditors. If improvement doesn't occur during the administration period and a company remains insolvent, it can ultimately still end up being liquidated.

Conclusion

Going into administration is a legal process that a company can undertake when it is facing financial difficulties. When a company enters into administration, the daily management and control of the business is handed over to an appointed administrator, who is usually a licensed insolvency practitioner.

The administrator’s primary objective is to achieve one of the statutory goals of administration, which may include rescuing the company as a going concern, liquidating assets to distribute the proceeds to creditors, or finding a better return for creditors than would be possible through liquidation.

For business owners, this means that they lose control of the day-to-day operations of their business, but the process provides a breathing space for the company to restructure and potentially avoid liquidation. The administrator will work with creditors, stakeholders, and potential buyers to find the best outcome for all parties involved.