what happens to staff when a company goes into administration

What happens when a company goes into administration

what happens when a company goes into voluntary administrationAdministration of a Limited Company or PLC can be an intimidating process for many company directors, even so it can offer the best chance of effecting the recovery and successful turnaround of a business if used properly.  

Entering into administration is often seen as a punishment that insolvent companies are given by the courts when they’re unable to pay. Although some administrators are appointed in this way, many company directors choose to voluntarily appoint their own administrator independently.

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. 

The directors of the company can appoint an administrator quickly with the guidance of their insolvency practitioner.

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.

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.     

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.

The Administration Process

When a company goes into administration, the administrator will aim to rescue the company in order to get the best possible result for the creditors. They may also realise any assets or company property which will be used to pay secured and prioritised creditors.

The administrator has 8 weeks to manage the process and send out a proposal to the creditors on the plan of action to pay back debts and manage the administration. This will outline how they will try to get the best outcome for creditors.

The administration process can go on for up to a year, depending on the nature of the situation. When considering payments to creditors there is a general order of priority during the administration process.

  1. Secured creditors
  2. Preferential creditors
  3. Unsecured creditors
  4. Shareholders

The administration process normally ends automatically after the 1-year period is up. During this time, the company may have been rescued, in which case it can be passed back to the directors. If the administration was unsuccessful then the company may go into liquidation or have been dissolved if secured and/or preferential creditors have been paid, but none of the other creditors

How long does going into administration last?

It depends very much on the circumstances.  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.

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.

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 about company 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.

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